Investing in a brighter futureLegal&General Group Plc|Annual report and accounts 20231_Cover_IFC_Hig.
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SAP Annual Report on Form 20-F 2023 SAP 2023 Annual Report on Form 20-F 2 UNITED STATES SECURITIES .
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CHANGING WOOD TO CHANGE THE WORLD Annual Report and Financial Statements 2023WHATS INSIDEOUR BUSINESS MODEL26OUR STRATEGY28OUR GLOBAL TECHNOLOGY CENTRE 10BUSINESS REVIEW34SUSTAINABILITY56Overview02 Key Highlights04 Our Business at a Glance 06 Case Study How We Enhance Nature08 Case Study Accoya Color10 Case Study Our Global Technology Centre 12 Reasons to Invest14 Executive Chairs StatementStrategic Report20 Our Products22 Our Market26 Our Business Model28 Our Strategy34 Business Review 44 Finance Review50 Risk Management56 Sustainability 67 Stakeholder EngagementCorporate Governance74 Board of Directors76 Senior Leadership Team78 Chairs Statement of Governance80 Corporate Governance82 The QCA Corporate Governance Code(the QCA Code)Statement of Compliance 202388 Audit Committee Report90 Nomination Committee Report92 Health,Safety and Environment(HSE)Committee Report93 Remuneration Report108 Directors Report112 Statement of Directors ResponsibilitiesFinancial Statements116 Independent Auditors Report to the members of Accsys Technologies PLC125 Consolidated Statement of Comprehensive Income126 Consolidated Statement of Financial Position127 Consolidated Statement of Changes in Equity128 Consolidated Statement of Cash Flow129 Notes to the Financial Statements166 Company Statement of Financial Position167 Company Statement of Changes in Equity168 Notes to the Company Financial StatementsShareholder Information175 Shareholder InformationView the latest results online at|HOW WE ENHANCE NATURE Our acetylation process 06ACCOYA COLOR08Accsys is a fast-growing business with a purpose:CHANGING WOOD TO CHANGE THE WORLDWe combine technology and ingenuity to enhance the properties of wood to create products that are extremely durable and stable,presenting new opportunities for the built environment.FY23 has been a year of significant progress and change for the Accsys business.It has also been a year that has produced some well-documented challenges.”Stephen OdellExecutive ChairFor more information,please see the Executive Chairs Statement|Page 1434%GROWTH IN REVENUE AT 162.0m120%GROWTH IN UNDERLYING EBITDA1 AT 22.9m6%GROWTH IN ACCOYA SALES VOLUMES AT 63,344m3FY23 has been a year of significant progress and change for the Accsys business.It has also been a year that has produced some well documented challenges.The underlying health of the business has never been stronger.We delivered our highest volume production ever in FY23 post the installation and start-up of reactor 4,and the global demand for both Accoya and Tricoya continues to grow.Post the year end,and with a new management team in place,including the appointment of Dr.Jelena Arsic van Os as CEO Designate and Steven Salo as Group CFO,the business is now well placed to capitalise on this customer demand and execute against our ambitious capital projects.We have made significant progress in growing production capacity through the completion of a fourth reactor at our plant in Arnhem,enabling us to produce record volumes of Accoya in Q4.We have also made good progress on the construction of our plant in Tennessee.However,the project has experienced some delays and cost inflation and,as a result,commercial operations are now expected to commence in mid-2024.Construction of the worlds first Tricoya plant in the UK has been more challenging,with the project in a hold period while we assess its capabilities and funding options.Our new management team is well positioned to decide how to move forward in the best way for the business.The future growth opportunity for Accsys is clear and we are focused on delivering against our strategic growthplans.Cover:Accoya cladding,windows and doors and shutters.Architect:Good Architecture.Builder:Winchester Construction Co.,Inc.Window&Door Manufacturer:Dover Windows&Doors.Landscape Architect:Lila Fendrick.Photography:Erik Kvalsvik.Interior Designer:Mona Hajj Interiors1.On an underlying basis,including the Groups attributable share of our USA joint ventureOVERVIEWGOVERNANCESTRATEGIC REPORTFINANCIAL STATEMENTS01|Accsys Technologies PLC|Annual Report and Financial Statements 20232023 162.0m2022 120.9m2023 34 22 30 23 55.2m2022 36.0m2023 11.0m2023 22.9m20222023(44.1)m2022(27.2)m10.4m2022 1.3mKey HighlightsGROUP REVENUE 162.0m 34%GROSS PROFIT 55.2m 53%UNDERLYING EBITDA122.9m 120%GROSS PROFIT MARGIN34%UNDERLYING PROFIT BEFORE TAX11.0m NET DEBT(44.1)m 1.On an underlying basis,including the Groups attributable share of our USA joint venture More financial highlights|Page 44 See our ESG highlights|Page 56 For our Alternative Performance Measures details|Page 136Project:Villa Harmony,Ibiza,Balearic Islands,SpainDistributor:Grupo Gmiz Architect:Paco Candel Carpentry:Carpintera Gil AlmansaFor more Accoya projects go online at| SALES VOLUME63,344CUBIC METRESACCOYA SALES GROWTH 6COYA SALES GROWTH H2 ON H1 64%HEALTH AND SAFETY0.9LOST-TIME INCIDENT RATEINCREASED RENEWABLE ELECTRICITY USAGE AS A PROPORTION OF TOTAL ELECTRICITY TO63%OF THE OVERALL MIX,INCLUDING RECS (2022:39%)CERTIFIED SUSTAINABLE (I.E.FSC(CO12330)WOOD SOURCES 100%(2022:100%)See our Business Review|Page 34 Financial highlights Operational and ESG highlightsOVERVIEWGOVERNANCESTRATEGIC REPORTFINANCIAL STATEMENTS03|Accsys Technologies PLC|Annual Report and Financial Statements 202302Our Business at a GlanceOur purposeCHANGING WOOD TO CHANGE THE WORLDChanging wood is what we do,and to change the world is why we do it.Our purpose gives us a common,aspirational goal to work towards and is embraced by our stakeholders:making the world a better,more sustainable place.Our valuesOur values represent what we believe in as a company.We use them to guide our strategy and actions for the long term and on a daily basis.Our values are:Who we areWe combine technology and ingenuity to enhance the properties of wood to create products that are durable and stable,presenting new opportunities for the built environment.1Be ambitious the world depends on usOur ambition is to change the world it doesnt get much bigger than that.We must be bold,agile and committed to our goals.We have to be all in and move quickly and decisively.To achieve our ambitions we may make mistakes,but we must not be afraid to try.We will always learn from the experience.2Respect and value all stakeholdersEveryone we work with is important our colleagues,customers,partners,suppliers,shareholders and more.We act with integrity and authenticity,encourage collaboration,and build trust through inclusion and mutual respect.As a team,we will succeed.3Be committed to safety,quality and sustainabilitySafety is of the utmost importance in everything we do.We all share responsibility for protecting people,property and the environment at all times.We strive to fulfil our brand promise and delight our customers.We commit to delivering consistently high quality.Our productsAccoya is the worlds leading high performance sustainable wood.Manufactured from abundantly available,FSC certified wood species,it is sustainable,durable,resistant to rot and Cradle to Cradle Certified.Tricoya wood chips are a feedstock for our licensees to manufacture high performance Tricoya panel products suitable for outdoor use.Our sustainable business modelThrough our sustainable business model we give the world a choice to build sustainability and create value for all our stakeholders.Investing in our futureRead more|Page 26Building new plants and optimising existing sitesWorking with business partnersGlobal sales and distributionProprietary manufacturingResponsible sourcingOur activitiesResearch and development(R&D)Our footprint Dallas sales office Kingsport Accoya site London Accsys head office Barry Accoya Color site Hull Tricoya site Arnhem Accoya site&office Freiburg Accsys sales officeKeyAccsys LocationsProduct DistributionUnder ConstructionOVERVIEWGOVERNANCESTRATEGIC REPORTFINANCIAL STATEMENTS|Accsys Technologies PLC|Annual Report and Financial Statements 20230405Case Study|INNOVATION IN ACTION HOW WE ENHANCE NATUREReactor in Arnhem plant 33DITIONAL CAPACITY IN ARNHEM IN FY23Find out more online| Accoya and Tricoya grow as global brands,the outstanding qualities of our ultra-high performance and sustainable wood products is becoming more widely recognised by customers,manufacturers and distributors.Our expertise in innovation has enabled us to transform fast-growing softwood into some of the most durable,stable and low maintenance wood products in the world.Accoya and Tricoya undergo a process called acetylation through which the structure of natural wood is permanently modified,giving it the same durable properties as more carbon-intensive man-made materials.The chemistry utilised in the acetylation process involves changing the molecular structure of wood cell walls.Free hydroxyls within these cell walls are responsible for the absorption and retention of moisture,causing swelling and eventual decay of the wood.Acetylation solves this problem by replacing these free hydroxyls with stable acetyl groups(already present in the wood),thereby reducing its ability to retain moisture and making it dimensionally stable and durable.Thorough real-world testing has been conducted over many years on Accoya,which means we can confidently provide industry-leading warranties of up to 50 years.Successfully commercialising this technology allows Accoya and Tricoya to become ideal wood products for a number of applications including joinery(windows and doors),cladding and decking.Innovation in technology allows us to truly enhance what nature gives us so that we can change wood,to change the world.Where other companies have tried and failed over the years to commercialise what is often described by those working in the industry as a wonder wood,we have perfected the process,which is protected with extensive intellectual property including c.388 patents and patent applications in 45 countries.”Pablo SteenwinkelGroup Head of TechnologyLourens Van As,Project Engineer in ArnhemScan here for more on our acetylation process Our proprietary acetylation processOVERVIEWGOVERNANCESTRATEGIC REPORTFINANCIAL STATEMENTS07|Accsys Technologies PLC|Annual Report and Financial Statements 202306Case Study|INNOVATION IN ACTIONACCOYA COLORDecking made out of Accoya Color 140%INCREASE IN VOLUME PRODUCTION OF ACCOYA COLOR IN FY23 Find out more online| Accoya Color pool decking with LED lighting,AustriaAccoya Color is our latest innovation and despite being available in only a few select markets,it is already proving to be agreat success.Accoya Color is made initially in the same way as regular Accoya wood but then undergoes a secondary manufacturing process during which it is coloured,surface to core,with a rich,grey tone.Colouring the wood in this way gives the product a premium and durable aesthetic for commercial applications,including decks and cladding projects.Accoya Color has all the same advantages as Accoya but with the additional benefit of being richly coloured,removing the requirement of having to manually stain or coat end users wooden decking or cladding and also the associated time and cost that comes with annual maintenance to keep the product looking fresh and uniform,year after year.Our technology means that Accoya Color remains consistently grey,even if scratched,pierced or cut through.It is also certified non-toxic and is barefoot friendly in even the warmest climates.In addition to the products existing markets of Germany,Switzerland,Austria and North America,Accoya Color was launched this year into the new markets of Australia,New Zealand and France.In 2022 Accoya Color was awarded Cradle to Cradle certification at the prestigious Gold level,as well as being awarded Platinum level(the highest level)for both Material Health and Water Stewardship.This certification demonstrates that Accoya Color is a product that adheres to very high standards of sustainability,alongside the recognised high performance and durability credentials of thebrand.”George NeelManaging Director,Accoya ColorProject:Color decking for pool surround,Switzerland Distributor:Holzagentur SchweizSupplier:SPA Sperrholz-Platten AGManufacturer:Brunner Zimmerei Holzbau GmbH PRODUCT DETAILSOVERVIEWGOVERNANCESTRATEGIC REPORTFINANCIAL STATEMENTS09|Accsys Technologies PLC|Annual Report and Financial Statements 202308Tamsin Stevens,ESG Manager,visiting our Global Technology CentreIts fantastic when our system partners see the value in the performance credentials of our brands and collaborate with us to create high performance product systems to overcome technical obstacles.”John Alexander Group Sales Director Case Study|INNOVATION IN ACTIONOUR GLOBAL TECHNOLOGY CENTRE Innovation is at the heart of what we do at Accsys and this has enabled us to become a leading modified wood manufacturer on the global stage.Situated next to our manufacturing facilities in Arnhem,our Global Technology Centre(GTC),led by Dr Pablo Steenwinkel,is focused on many innovation projects.The team is focused on both process and product innovation which impact the short,medium and long-term future of the business.Process optimisation is of paramount importance because of the growing global demand for our products.A small reduction in the batch cycle time or a small volume-optimisation step in the production process can produce meaningful gains in annual volume production,and with production capacity recently expanded in Arnhem,process optimisation and reliability remain core areas of focus for the GTCteam.There is a large addressable market for our existing product brands and we work closely with our Sales&Marketing teams to understand evolving consumer needs and to assess where innovation can meet thoseneeds.Some of our most exciting innovation work is being carried out with system partners businesses that manufacture products that are often used in conjunction with Accoya and Tricoya(such as adhesives,coatings and hardware).The GTC is core to the Accsys business,contributing to our performance today and developing the products and partnerships of the future.Our Global Technology Centre in Arnhem The new wood stacking process machinery at the Arnhem plantOVERVIEWGOVERNANCESTRATEGIC REPORTFINANCIAL STATEMENTS1110|Accsys Technologies PLC|Annual Report and Financial Statements 2023Accoya Color Grey cladding-private residence in Scarborough Hill,Christchurch New Zealand.Distributor ITI TimspecAccoya cladding,Vilnius,Lithuania Architect Architekturos linija.Sub distributor ArgillaReasons to InvestWE BELIEVE THAT ACCSYS TECHNOLOGIES REPRESENTS A COMPELLING GROWTH OPPORTUNITY FORINVESTORS 12Substantial market opportunity There is a growing need and regulatory push to move from non-renewable to renewable lower carbon construction materials.The properties of our products-sustainability,strength,durability and beauty-perform strongly against the highest performing non-sustainable and man-made materials.With the building sector accounting for c.38%of global CO2 emissions,renewable lower-carbon construction materials such as wood are gaining in popularity in the global construction industry.This presents a significant addressable market for our products.Sustainability Our products meet the growing demand for environmentally friendly alternatives seen in everyday life and in every sector of manufacturing.Our products are grown from renewable sources,sequester carbon and lock it in to a useful,recyclable and non-toxic building material.They enable creative and innovative design and construction,while fitting into a sustainable circular economy bio-cycle,reducing embodied carbon costs,and without risking environmental contamination through the leaching of chemicals or pollution.LOWENVIRONMENTALIMPACTSUSTAINABLYSOURCED See Our Market|Page 22 See our Sustainability section|Page563Scalable growthOur manufacturing process and modular industrial design is based upon confidential technical know-how and protected IP which can be expanded and replicated world-wide.As demonstrated by our successful plant in Arnhem,the Netherlands,the Accsys know-how and intellectual property allows us to add additional capacity to existing sites.Our Accoya USA plant in Kingsport,Tennessee has been designed in anticipation of adding additional reactors to the site as demand for the product grows.See Our Strategy|Page 2845World leaders in wood technology We have developed innovative,proprietary andprotected technologies which chemically modify wood through an acetylation process.The resulting products benefit from exceptional dimensional stability,durability and many other qualities.Ourproducts are best-in-class and are leading the revolution of modified woods in a growing building industry which is starting to recognise and adopt the significant long-term benefits of such materials.Strong organisational capability Talented people are at the core of Accsys,with skilled employees at all levels and committed and experienced leadership.This means Accsys has the ability to capitalise on and develop on growth opportunities.Our Board and Senior Leadership Team are highly committed and experienced,with varied backgrounds including from the broad industrials,chemical,manufacturing,consumer goods,marketing and finance industries.WORLDWIDEACCREDITATIONSORGANISED See Our Products|Page 20 Our Board and Senior Leadership Team|Page 74OVERVIEWGOVERNANCESTRATEGIC REPORTFINANCIAL STATEMENTS|Accsys Technologies PLC|Annual Report and Financial Statements 202312132023 162.0m2023 22.9m2022 120.9m2022 10.4mOverviewDespite particularly challenging macro-economic conditions,which include the ongoing war in Ukraine,an energy crisis,rising inflation,supply chain disruption and the pressing need to address climate change,Accsys has made significant progress in the 2023 financial year as we move forward with our ambitious plans for growth.The resilience of our business against this difficult backdrop is testament to the attractiveness of our products,the strength of our business model and the talent and commitment of our people.Overview of performance The successful construction and completion of a fourth reactor in our plant in Arnhem,the Netherlands,together with reactors 1-3 returning to production after the temporary shutdown of the plant in April and May during the completion of the R4 capacity expansion,led to our highest ever volume production in Q4.Demand for our Accoya and Tricoya wood has been strong as customers continue to seek products that deliver outstanding performance,durability and sustainability.The year has not been without its challenges,however.In November,we announced that,while we had taken 100%control of the world-first Tricoya project in Hull,we also put the project into a hold period of at least six months to assess future capability and funding options.While further work is required to prove the working capabilities of the plant,we have made good progress on this review over the past six months.We have also been assessing the cost to complete the project,developing extensive and detailed work packages in order to do so.This work stream has confirmed our original assessment of the costs to complete the project as up to 35m.Over the period we have also continued to sell Accoya to our off-take partners,MEDITE and FINSA,both of which convert Accoya wood into Tricoya and help seed the market.We continue to see good levels of market demand for the product,which reaffirms our view of the long-term market potential for Tricoya.Ongoing discussions with both partners about future arrangements following completion of the plant remain positive.We have also been in discussions with certain strategic partners with a view to providing appropriate funding necessary to complete the Hull plants construction.To date,the Company has been unable to reach acceptable terms with any of these strategic partners.In view of the strong market dynamics underpinning Tricoya,the Board of Accsys continues to believe in the underlying attractive economics and margins associated with completing the construction of Hull and therefore will continue to explore funding options to support the plants construction,including strategic partners and lending institutions.Absent the availability of third-party funding,the Company will use modest levels of internally generated cash to maintain the plant and progress certain pre-construction works.The Board will continue to engage with stakeholders in respect of Hull and its future prospects.Despite its belief in the future potential for Tricoya,the Board is clear that the base Accsys business must not be compromised to find a solution for Hull.In the meantime,we will continue to work with our partners to develop the Tricoya market using Accoya,including exploring the expansion of dedicated capacity for greater volume production within our existing facilities.We have made good progress with our Accoya USA JV with Eastman.However,construction has experienced some delays and cost inflation.Both Accsys and Eastman remain fully committed to delivering the project,which will replicate the proven technology of our successful plant inArnhem.2023 financial performanceAccsys delivered revenues of 162.0m,a 34%increase on FY22,reflecting continuing strong demand for our products,higher average sale prices and the implementation of an Energy Price Premium to mitigate higher gas prices.Underlying EBITDA was 22.9m,an increase of 120%on the prior year,and ahead of our market guidance of nearly doubling last years EBITDA of 10.4m.Group gross margin increased by 4 percentage points to34%,aided by the higher average sales prices outlined above.Underlying profit before tax increased by9.7mto11.0m.Statutory loss before tax was 67.1m.Net debt increased by 16.9m in the year to 44.1m dueto the planned investment into Accoya USA,(29m),capex investments of 29.8m into the Arnhem reactor 4 and Tricoya Hull projects(partially offset by a placing in May 2022 which raised net proceeds of approximately 19.0m),the reduction in the NatWest loan(9.4m)and EBITDA generation during the year.Our purpose,values and strategyOur purpose at Accsys is to Change Wood to Change the World.Ambition,respect for our stakeholders and our commitment to safety,quality and sustainability are the Companys three core values.We have bold ambitions for growth:we successfully enhanced our production capacity in Arnhem this year with reactor 4 and remain fully committed to further expanding our global production capability.Safety is of the utmost importance to Accsys and all our colleagues have a collective responsibility to protect people,property and the environment.We continue to strive to fulfil our brand promise and delight our customers with consistently high-quality products.Sustainability and our impact on society are core to what we do not just for our products,but also for how we operate as a company.Our strategy for growth is predicated on four priorities.They are:1.Grow product demand developing market opportunities to drive revenue growth;2.Practice manufacturing excellence growing our global manufacturing production capacity and doing things faster,better,and more safely;3.Develop our technology product R&D and process-related technologies and IP to protect and grow our leading market position;and 4.Build organisational capability developing our people and organisational capability to enable us to meet our growth objectives.We provide an in-depth review of our progress against these four priorities for growth in our Strategic Review onpages 28 to 33.Executive Chairs StatementA PROFITABLE YEAR WITH GOOD FUTURE PROSPECTSDespite delivery of strong growth in revenue and EBITDA in FY23,the year has not been without its challenges.”Stephen OdellExecutive ChairGROUP REVENUE 162.0m 34%UNDERLYING EBITDA 22.9m 120%OVERVIEWGOVERNANCESTRATEGIC REPORTFINANCIAL STATEMENTS|Accsys Technologies PLC|Annual Report and Financial Statements 20231415 BARNSNAP HOUSE PROJECTWest Sussex,United Kingdom Located in West Sussex,Barnsnap House is a modern five-bedroom property that was recently built on a woodland clearing site.To keep in tune with the natural surroundings of the previous woodland,timber cladding was used for the exterior faade of the familyhome.The timber chosen was Accoya,which is made from acetylated wood.Accoya has exceptional dimensional stability,evident from its 50-year above-ground warranty,and many other qualities,as well as being sustainably sourced.It was crucial for the client that the Accoya had a rustic finish with a coating that was easy to maintain and a colour that was between black and brown.James E.Hatch&Son supplied sawn-face Accoya cladding and produced an in house bespoke colour using a coating system from Anker Stuy Coatings to match theclientsrequests.The client was able to select from three rustic timber finishes,each with slightly different shades and appearances.Executive Chairs Statement continuedAward-winning and sustainable wood productsDuring the year,Accoyas high level of performance and sustainability was recognised in various prestigious global industry awards.Accolades include the EmiratesGBC Green Building Product of the year and the Best of Products award from The Architects Newspaper,USA for Accoya Color Grey.We continue to see strong customer support for our products,such as Google,where Accoya has been specified on its new HQ landscraper building in Kings Cross,London.Health&Safety During the year,the Company rolled out a number of dedicated safety learning programmes and initiatives,including a Health&Safety month in February 2023 which gave our colleagues the opportunity to participate in group discussions on safety improvement,training sessions and guest speaker events.Health&Safety continues to be a top priority for the Board and for Accsys,and the Board-level HSE Committee established in 2022 has helped support the Boards focus on this key area.ESG Accsys is committed to growing and operating its business in a responsible and sustainable way.Aligned with our values and business strategy,our ESG framework outlines 10 key material issues and impact areas on which we are primarily focused.Having completed Stage One of our 2020 sustainability strategy roadmap,we are now in Stage Two and are focused on establishing specific development plans,including setting Science Based Targets(SBTs)to reduce our emissions intensity per cubic metre of Accoya produced.Building on our commitment to transparency,Accsys participated for a second consecutive year in the S&P Global Corporate Sustainability Assessment.Accsys scored 43/100-an improvement of five points(13%)on the prior year,placing the Company in the top quintile inthe Paper&Forest Products industry category.Capital raiseIn May 2022,the Company completed a 19m net capital raise from shareholders to support the completion of current capital projects and increase working capital and cash flow headroom.We extend our thanks to shareholders for their continuing support and investment in Accsys.Our BoardThe Boards composition brings depth and a range of experience to Accsys,both supporting and challenging the Executive team in the execution of the Companys strategy.Post the year end,there has been some considerable change with the departure of Rob Harris and William Rudge from the Board,together with the appointment of Dr Jelena Arsic van Os as Chief Executive Office Designate and Steven Salo as Chief Financial Officer.We also announced in May 2023 that Sean Christie,Sue Farr and Alexander Wessels are to step down from the Company as Non-Executive Directors at the forthcoming AGM in September.Please see my Statement of Governance letter on page 78 for further details on these changes.Our people and stakeholders I would like to express my sincere appreciation to our colleagues across the Company for their continued dedication,loyalty and hard work.I would also like to express my thanks to our shareholders,customers,business partners,suppliers,and contractors for their continued support of Accsys Technologies.CASE STUDYSupplier:James E.Hatch&SonCoatings:Anker StuyFor more Accoya projects go online to| STATEMENTSLooking aheadWe expect to leverage the benefits from greater economies of scale associated with higher production volumes at our plants.FY24 will also be a year of transition,during which we will implement actions to ensure the future sustainable growth of the business and to drive value creation for our shareholders.These actions include moving towards completion of the Kingsport plant,which will incur higher costs this year as we invest in people and infrastructure in readiness for start-up and making key investments in the core business to support higher volume production.In view of our increased capacity at Arnhem and future capacity from Kingsport,and in light of some softening of price and demand in the global construction industry,we are dedicating more resource to sales and marketing,particularly in the US,to prepare for a greater level of supply as this project comes online.We have made a good start to FY24.With our new executive management team in place to drive the business forward,we are confident in delivering further financial and operational progress in the coming year,and in the longer-term demand and growth opportunity for Accoya and Tricoya.Stephen OdellExecutive Chair26 June 2023 PRODUCT DETAILSOVERVIEWGOVERNANCESTRATEGIC REPORTFINANCIAL STATEMENTS|Accsys Technologies PLC|Annual Report and Financial Statements 20231617OVERVIEWGOVERNANCESTRATEGIC REPORT17STRATEGIC REPORTStrategic Report20 Our Products22 Our Market26 Our Business Model28 Our Strategy34 Business Review 44 Finance Review50 Risk Management56 Sustainability 67 Stakeholder EngagementFINANCIAL STATEMENTSOVERVIEWSTRATEGIC REPORTGOVERNANCE191918|Accsys Technologies PLC|Annual Report and Financial Statements 202325&50 YEAR WARRANTIESHIGHLY STABLEHIGHLY DURABLELONG SERVICE LIFENATURAL WOODLOW MAINTENANCEMULTIPLE FINISHESBESPOKE OPTIONSIDEAL FOR COATINGWIDE BOARDS AVAILABLENON TOXICWORLDWIDE ACCREDITATIONLOW ENVIRON-MENTAL IMPACTSUSTAINABLY SOURCED100%RECYCLABLEINSECT RESISTANTFOR ALL CLIMATESFEWER CALL BACKS50 YEARWARRANTYINSECTRESISTANTBESPOKEOPTIONSHIGHLYSTABLEFOR ALLCLIMATESHIGHLYDURABLELOWMAINTENANCEFEWERCALL BACKSLONG SERVICE LIFELOWENVIRONMENTALIMPACTNON TOXICSUSTAINABLYSOURCEDWORLDWIDEACCREDITATIONS100%RECYCLABLEOur ProductsACCSYS PRODUCES TWOPRODUCTSFind out more online|Find out more online| and Tricoya redefine performance when it comes to timber.Both product brands are highly durable with industry-leading warranties of up to 50 years above ground and 25 years in ground or freshwater.Offering outstanding dimensional stability in their composition,both products are suited to extreme climates as well as offering high levels of insectresistance.Accoya is our acetylated solid wood product brand.It is the worlds leading high performance sustainable wood brand,sourced from fast growing,FSC certified forests.It is both highly stable and resistant to rot,with properties that match or exceed those of the most durable tropical hardwoods,plastics and other non-renewable alternatives.Ideal for use across numerous internal and external applications,Accoyas primary applications are windows,doors,decking and cladding.Tricoya wood chips are the principal ingredient used by our licensees to manufacture Tricoya panel products(similar to MDF)with enhanced properties:exceptional durability,very high dimensional stability and ideal for use in wet environments internally or externally.These properties open countless opportunities for specifiers,architects,joinery manufacturers and product designers.Our products are defined by three sets of credentials:performance,finish,and sustainability.It is with this combination of product attributes that we seek to delight our customers and stand apart from the competition.WARRANTY FOR50yearsABOVE GROUND AND 25YEARS IN GROUND ORFRESHWATERREDUCTION OF OVER75%IN SWELLING CAUSED BYMOISTURE UPTAKECERTIFICATIONDEMONSTRATING LEADINGSUSTAINABILITY CREDENTIALSFINISHAccoya and Tricoya products look better for longer.Accoya affords the option of being left uncoated to weather naturally or opting for a coated finish.Due to the excellent dimensional stability of both Accoya and Tricoya,coatings last longer,with many coatings manufacturers offering extended coating warranties on their products.Maintenance time is reduced,saving time and money over the long term.Versatility of products means design freedom not normally achievable with other woodproducts.SUSTAINABILITYBoth wood product brands compete not only with other wood products,such as tropical hardwoods,but also other carbon intensive materials such as aluminium,steel,concrete and plastic.The durability of our products means that we are well placed to substitute these less sustainable materials,as well as offering the additional sustainability benefits that building from wood affords.All sourced wood that is used to manufacture both Accoya and Tricoya is FSC certified.Our Accoya product brand is also certified by Cradle to Cradle at the Gold level.Accoya comparison chart AccoyaSapeleOakMerantiIrokoRedwoodLifespan ()()()Warranty N/AN/AN/AN/AN/ACoatings performance Thermally insulated Maintenance intervals The number of Xs(1-3)are an indicative scale with one X being the worst and 3 Xs being the best.FINANCIAL STATEMENTS|Accsys Technologies PLC|Annual Report and Financial Statements 202320OVERVIEWSTRATEGIC REPORTGOVERNANCE21Our MarketA SIGNIFICANT GROWTH OPPORTUNITYOverviewAccsys products are positioned within the global wood products market,which is estimated to be worth$748bn in 2023 with a compound annual growth rate(CAGR)of 7.4%(Source:TheBusiness Research Company).Macro-economic trends,wider societal megatrends and market penetration opportunities provide uswith significant growth and demand drivers.With demand for our products exceeding our volume of supply,increasing our production capacity,as we have done in our plant in Arnhem this year,is central to salesgrowth.The global wood products industry produces approximately 800m cubic metres per annum(Source:The UN Food&Agriculture Organization).As our products compete with and displace other non-wood building materials from concrete toplastics,the market opportunity isevengreater.Three key factors support our view ofthe market potential for ourproducts:Our products outperform competing materials most strongly when used in an outside environment.The global outdoor wood market is estimated to be around 14%of the global lumber orsawnwood market;They compete with the high value end of the outdoor wood market,which represents around 25%ofthe global outdoor wood market;and Our achievable market figure reflects our focus on six key geographic targets and four product use categories.Demand driversThere are three main of drivers of demand for our products:1Industry demand driversGDPRising GDP per capita,economic development and higher standards of living are fueling construction,the principal driver of wood consumption,across the world.Construction&redevelopmentOur products are used in new constructions and in the refurbishment,redevelopment and remodelling ofcommercial and residential buildings and projects.Underlying drivers include rising standards around expectations of building usages,performance and design,and regulatory changes(notably building safety,maintenance,sustainability and energy performance).Construction and redevelopment is also impacted by unexpected macro events,such as the COVID-19 pandemic which led to greater levels of home improvements from consumers spending more time athome.FINANCIAL STATEMENTS63,344m3 Accoya sold in this financial year3Market penetrationOur products are most frequently chosen for their characteristics,quality and performance across all climate extremes,and this is fundamental to our proposition.This competitive advantage against other woods and non-wood materials means we believe we can grow faster than the market through market penetration and share gains.Market share and growthSince proving the commercial viability of acetylated wood,Accsys has grown its market share and brand awareness in the industry through market seeding within ourcurrent model of distributor supply andmanufacturersupport.2MegatrendsSustainabilityThe built environment is responsible for almost 40%of global carbon emissions.In addition to decarbonisation,the Race to Zero,and setting of net zero carbon targets,there is also an increasing focus on renewable resources to reduce embodied carbon in materials and buildings.In addition,many countries and global businesses now have mandatory,legislative targets to be carbon neutral by 2050.Shifting consumer priorities Consumers in our geographic end markets continue to shift towards products that have a lower environmental impact,from shopping bags and drinking straws to the cars we drive.The trend is the same in the built environment:around the world we can see evidence of mass timber buildings using renewable,carbon-storing wood in place of concrete and steel.Lifestyle changesSocio-economic changes are driving a cultural shift in expectations for residences and commercial buildings and there is an increasing demand for high performance and low maintenance wood products suitable for outdoor use,with this segment expected to grow faster than for softwood grades generally.|Accsys Technologies PLC|Annual Report and Financial Statements 202322OVERVIEWSTRATEGIC REPORTGOVERNANCE23Our Market continuedCompetitive advantage andmaterial substitutionAccoya solid wood has best-in-class properties that match or improve upon unsustainable alternatives,together with certified sustainability credentials.Our acetylation process substantially reduces the effects of water on wood,dramatically reducing susceptibility to swelling,shrinking and decay.Architects,specifiers,manufacturers and end users no longer need to choose between performance and sustainability,with Accoya offering clear advantages over non-renewable,unsustainable and heavily polluting alternatives such as tropical hardwoods,synthetics,plastics and mined metals.Agreements have been secured with MEDITE and FINSA,who use the Tricoya acetylated wood elements in place of traditional wood chip feedstock to create,market and sell Tricoya panels.Sales of Tricoya panels have increased significantly each year since MEDITE introduced them to the market in 2012,being used both in place of traditional panels and in applications where wood panels would not have previously beenfeasible.By increasing our manufacturing capacity around the world,we can develop existing markets,expand intonew territories and grow our product range and applications.The enhanced performance and suitability for use in wet environments of our Tricoya panels not only improves their appeal compared to traditional more expensive and less easily handled panel products,but also introduces new use scenarios and design possibilities.Sales of Tricoya panels have increased significantly each year since their introduction to the market(pleasesee pages 44 to 49 for further details).Both products also offer market-leading warranties and service life,along with the sustainable benefits and credentials that make them particularly attractive in an increasingly environmentally-responsible world.Route to marketOur focus on marketing and selling to our distributors and their customers has proven to be a successful route to establish our products in the market as we challenge traditional preconceptions about materialchoice.We have built and developed strong relationships with our distributor networks in key territories,achieved through training,support and engagement with both them and their manufacturing customers.As a result,we are able to develop brand and product advocates throughout the value chain.We are also seeking to significantly increase awareness of the benefits of Accoya with end users and consumers.Currently our extended sales network,with our partners and customers,is a major driver of end user demand,expert recommendation being highly valued in our markets.However,we are already seeing evidence of Accoya in particular gaining a very positive reputation with enthusiastic propertyand homeowners.Targeted segment penetrationWith products that could be described as disruptive to existing materials,and with demand exceeding production capacity,we have focused on developing regions and product applications which will support rapid but sustainablegrowth.The majority of Accoya sales are to a network of timber distributors which in turn supply a variety of industries,principally for joinery(windows and doors),decking and cladding.Accoya is primarily selected for use by architects,manufacturers and specifiers for its high-performance characteristics.Tricoya panels are currently manufactured using chipped Accoya wood,in advance of the completion of the dedicated Tricoya wood chip acetylation plant in Hull,UK.The integration of our Approved Manufacturer Programme with location-and application-based Where to Buy listings on our website has resulted in significantly increased throughput of demand to vendors of Accoya products,benefitting our brand,our customers,and endconsumers.This year,we launched a new UK national advertising campaign,“Lasts a Lifetime”,highlighting the high performance of Accoya wood to homeowners.The campaign launched with a commercial on Sky TVtargeting a subset of the homeowner market audience,supported by digital advertisements.Product applicationsOur products encourage manufacturers,architects,specifiers and consumers to make sustainable building material choices on multiple globalapplications,without compromising on performance.DECKINGWood decking has a look and feel of its own.Our products resistance to cracking,splinters,and other effects of weather and water offers the choice for genuinely sustainable,long-lasting decking of unmistakable quality.WINDOWSClassic looks with contemporary performance:Accoya wood window frames deliver all the benefits and beauty of natural wood with none of the downsides:superior thermal insulation,minimal upkeep,maximum stability,durability andsustainability.DOORSIndustry-leading stability means that our products wont shrink and swell like other wood:reducing the chance of sticking or jamming in wet conditions,and helping coatings last far longer before cracking or peeling.Tricoya and Accoya provide compelling advantages for all kinds of exterior doors.CLADDINGForm and function combine perfectly as Accoya andTricoya give designers,specifiers,woodworkers,architects and property owners a material with boundless creative possibilities,world-leading sustainability credentials and best-in-class long-term performance.Demand driversThere are three main types of drivers of demand for our products.FINANCIAL STATEMENTSScan here to view our “Lasts a lifetime”commercial|Accsys Technologies PLC|Annual Report and Financial Statements 202324OVERVIEWSTRATEGIC REPORTGOVERNANCE25Our differentiatorsWe utilise the following resources and relationships,which offer us a competitive advantage in our marketplace:Our Business ModelGIVING THE WORLD A CHOICE TO BUILD SUSTAINABLYThrough sourcing,production,and bringing products to market,our business model enables Accsys to fulfil ourpurpose and give the world a choice to build more sustainably.Our activities We combine chemistry,technology and ingenuity to make high performance wood products that are extremely durable and stable,and opening newopportunities for the built environment.Our business and products add value at each stage from sourcing to sale and use,through their quality,sustainability,competitive benefits and longevity.Our activities also focus on strategic expansion of our business to capture the substantial global market opportunity we believe is achievable with ourproducts.We obtain the raw wood timber we use to produce our products from certified sustainable,well-managed and fast-growing forests through wood mills and wood chip suppliers in New Zealand,Argentina,Uruguay and the UK.We work with acetyls providers to source acetic anhydride and sell-back acetic acid,our reusable by-product into themarket.We manufacture our wood products using our proprietary,wood acetylation process at our existing plant in the Netherlands.We work with a network of global distributors to get our sustainable wood products to our customers,who utilise Accoya and Tricoya materials to create branded products such as windows,doors,decking,cladding,faades and other external applications.Our technology and IPWe have developed families of patents,providing robust protection over our proprietary products and processes.Our people and engineering expertiseOur passionate employees are key to the successful execution of the Groups strategy,together with their valuable know-how and a dedication to the future success of the Group.Environment and sustainabilityAccoya&Tricoya fit perfectly in the bio-cycle of the circular economy.Strong industry relationshipsWe work with equipment manufacturers,wood suppliers,the acetyls industry,testing and certification bodies,and other system supply specialists,to help us develop our technology,products andtheir place in the market.Industry-leading brandsOur brands Accoya and Tricoya are globally registered trademarks,portraying our products sustainable,high quality and long-term performance.Financial positionWith continued growth in revenue and a cash generative Accoya business,our financial position will support our global growth plans.45 countriesin which we hold c.388 patent family membersOver 60 countriesin which our brands are registered trademarks 34%Revenue growth in FY23Accoya isCradle to Cradle Certifiedat the Gold levelForest Stewardship Council(FSC)certifiedOutputs 63,344m3Accoya wood sold this year 34%FY23 revenue growth which continues to be driven by ongoing distribution customersResponsible sourcingProprietary product manufacturingGlobal sales and distributionBuilding new plants and optimising existing sitesResearch and development(R&D)Working with business partnersAccoya USAjoint venture with Eastman in Kingsport,TennesseeWe develop and optimise existing sites and processes to benefit from existing skills and leverage operational and financial scale.We identify new international locations and appropriate partners to develop additional capacity in order to meet our longer-term growth potential in global markets.We have developed innovative,proprietary and protected technologies.We continue to investin R&D,focused on optimising our existing product offering and technologies and investing in focused technology solutions.Working with the right business partners helps us maximise our potential,enabling our growth to realise the substantial global market opportunity for our products.We continue to advance our strategic priorities,in particular by working with partners which have resources or technologies that complement ourown.1.5m R&D investment*in FY23*excludes capex on new technologyMEDITE and FINSA convert Accoya into Tricoya wood panelsOur stakeholdersWe work with our stakeholders across our business activities.Through our business activities,we create value for stakeholders in different ways.Our Stakeholder Engagement report on page 67 sets out further detail on our stakeholder relationships.Our Stakeholders SHAREHOLDERSARCHITECTSEMPLOYEESSUPPLIERSMANUFACTURERSCONSUMERSDISTRIBUTORS&SPECIFIERS See our Stakeholder Engagement section|Page 67FINANCIAL STATEMENTS|Accsys Technologies PLC|Annual Report and Financial Statements 202326OVERVIEWSTRATEGIC REPORTGOVERNANCE27Our StrategyREALISING OUR AMBITIOUS GLOBAL GROWTH PLANWe have bold ambitions for growth:we successfully enhanced our production capacity in Arnhem this year and are fully committed to further expanding our global production capability with a focus on four strategic priorities.Our focus Drive sales growth in key markets and categories Maintain strong customer relationships,service and support Build and protect our brands Maximise our competitive advantage through product performance,quality,and sustainability Capitalise on our ideal positioning to benefit from global sustainability and consumer megatrendsGROW PRODUCT DEMANDDeveloping market opportunities to drive revenue growth2023 Progress Total sales volume up 6%at 63,344m3 Strong customer demand with record sales in Q4 Website conversion rate at an all-time high Further increase in lead generation funnel into Approved Manufacturers Accoya Color sales growth in decking in DACH region;new market launches in Australia,New Zealand and France Modest volume growth and more significant revenue growth in North America,despite major supply constraint in H1 and a softening market in H2 Launch of first UK consumer(B2C)campaign:national advertising campaign on Sky TV and digital YouTube campaign.Total 11.2 million impressions combined in Phase 1Looking forward Continued strong product demand despite slowdown in global construction industry and softer price/demand in key timber markets;more resource dedicated to Sales&Marketing to create further demand as capacity becomes available Continued North American sales and brand development System Partner expansion co-branding with coatings,adhesives,and hardware manufacturers Further expansion of B2B activities including Approved Manufacturers Programme and collaboration with customers Increasing B2C brand awareness in core markets to drive consumer pull Accoya Color market expansion into North America Read more about Our Products|Page 20Material Issues Sustainable&quality productsEnergy&climate changeResponsible sourcingSociety&CommunitiesGovernance,management and advocacyDevelop our technologiesContinue to build our organisational capabilityDeliver manufacturing excellenceGrow product demand200mm wide Accoya wood boards were used for the roof and fastened board-on-board.Design Unknown Architects,Photography MWA Hart Nibbrig,Contractor Kolthof BV,Location The NetherlandsFINANCIAL STATEMENTSOVERVIEWSTRATEGIC REPORTGOVERNANCE2928|Accsys Technologies PLC|Annual Report and Financial Statements 2023For more Accoya projects go online to| Strategy continuedOur focus Grow manufacturing capability and production capacity in North America,Europe and internationally Optimise our plants and processes for scalable growth Replicate proven technology with continuous improvements Ensure colleague safety across all our operations Partner fairly with third parties Read more about our manufacturing expansion in the Executive Chairs Statement|Page 14DELIVER MANUFACTURING EXCELLENCEGrowing our global manufacturing production capacity Doing things faster,better,and more safely2023 Progress Completion of Arnhem fourth reactor 33pacity expansion Good progress with Accoya USA JV with Eastman,however project has experienced some delay and cost inflation Accsys now has 100%control of Tricoya Hull plant,construction substantially complete,project in Hold Period while Board assesses future capability and funding options(see page 14)In-year operational improvements to Accoya Color plant in Barry to drive further volumes in FY24 Further development of safety strategy and culture,and increased monitoring and reporting of safety indicatorsLooking forward Ongoing ramp up to optimal capacity in Arnhem Conclusion of Board review into Hull Project and decision on strategy going forward Commercial operations at Accoya USA plant now expected mid-2024Material Issues Sustainable&quality productsEnergy&climate changePeople and wellbeingEcological footprintGovernance,management and advocacyResponsible sourcingHealth and safety ACCOYA DECKINGMonkey Mia,Australia At Monkey Mia beach front,located 900km north of Perth,Accoya decking was installed in late 2021.These photos were taken several months later,in August 2022,in front of the dolphin experience centre.The area is well known for its frequently visiting bottlenose dolphins,and the centre maintains a positive relationship between the dolphins andhumans.Accoya wood replaced wood-plastic composite(WPC)decking,also being used this time for street furniture along the boardwalk and steps to connect the different levels.The replacement material was required because visitors were unable to walk or sit on the WPC decking as it got far too hot.Accoya does not have this problem as even in the height of summer,the low thermal gain ensures Accoya decking is barefoot friendly.Accoya approved distributor,M&B,supplied the decking boards for this project uncoated.The natural Accoya wood has already started weathering and the photograph below of the steps shows the colour difference in the first 10 months.Distributor:M&B CASE STUDY PRODUCT DETAILSFINANCIAL STATEMENTS|Accsys Technologies PLC|Annual Report and Financial Statements 202330OVERVIEWSTRATEGIC REPORTGOVERNANCE31CONTINUE TO BUILD OUR ORGANISATIONAL CAPABILITY Developing our people and organisational capabilities to manage our growthOur Strategy continuedDEVELOP OUR TECHNOLOGIES R&D of product and process-related technologies and IP to protect and grow our leading market positionOur focus Pursuing process technology to enhance efficiency Optimising existing products Protecting our IP Sourcing responsibly Lowering resource use and incorporating circular processesOur focus Talent management:adding new skills and talent Developing our people:Leadership&Training Engaged workforce Living our values and culture2023 Progress Expansion of Global Technology Centre and R&D team to drive growth through innovation and continued improvements to Accoya and Tricoya business activities Installation and start up of new automated wood handling equipment in Arnhem to improve wood handling and efficiency Ongoing research into alternative sourced wood species performance,resulting in the commercial launch of Accoya made from Taeda(see page 39)Steady production at Accoya Color plant in Barry;improved production cycle time leading to higher volumes Continued and expanded IP protection,and safeguarding freedom to operate,in various areas applicable to the Accoya and Tricoya businesses2023 Progress Further strengthening of manufacturing expertise and leadership through appointments of new Group Manufacturing and Projects Director and new MDs for Hull and Barry plants Increased investment in training and development to support skills and talent pipeline;significant increase in colleague training modules and training hours per colleague Post the year end,in April 2023 the Company announced the appointments of a new CEO and CFO,with significant experience in large capital project management,cost management and financial forecastingLooking forward Ongoing improvements to overall production process efficiencies,including new quality scanning capabilities of wood handling process and equipment Longer-term research into potential for additional product categories as overall capacity increases Continued development and expansion of our IP portfolio to support business strategy Continued research into,and assessment of,alternative raw materials supply options Preparations for Kingsport Accoya production site commissioning and start-up in mid-2024Looking forward Improving capital project delivery:stronger project management and contracting practices Ongoing progressive enhancement of processes and management systems New leadership training programmes and talent mapping,to ensure we have the right skills and talent in place to grow our business effectively Continued improvements resulting from colleague survey feedbackMaterial IssuesMaterial Issues Sustainable&quality productsInnovation and technologyGovernance,management and advocacyPeople&Wellbeing,Fair&Ethical Conduct Read more about Innovation&Technology|Page 39 Read more about our Senior Leadership Team|Page 76FINANCIAL STATEMENTS|Accsys Technologies PLC|Annual Report and Financial Statements 202332OVERVIEWSTRATEGIC REPORTGOVERNANCE33SUCCESSFUL EXPANSION OF CAPACITY IN FY23The successful construction and completion of a fourth Accoya reactor in Arnhem,together with reactors 1-3 returning to production after the Arnhem plants shutdown in April and May,has led to our highest ever volume production in Q4.Business ReviewOverview of the yearDemand for our Accoya and Tricoya wood was strong(and in excess of our capacity)as customers continued to seek products that deliver outstanding performance,durability and sustainability.Despite the production outages linked to the completion of reactor 4 highlighted above,the Company delivered very strong revenue growth for the year,underpinned by strong product demand and increases in average sales prices.Underlying EBITDA more than doubled year on year,due to increased average sales prices and an energy price surcharge mechanism which successfully offset raw material cost increases,including the impact of high and volatile prices for acetic anhydride used in our acetylation process,and energy prices in Europe.Despite general price reductions in the global wood products market,the Company has maintained its prices in H2 and into FY24.The energy price premium ceased to be applied beyond the end of FY23.In November we announced that,while we had taken 100%control of the world-first Tricoya project in Hull,we also put the project into a hold period to assess future capability and funding options.Please see the Executive Chairs statement on page 14 for further details on progress the Board has made with its review.We have made good progress with our Accoya USA JV with Eastman.However,construction of the plant(which commenced in April 2022)has experienced some delays and cost inflation.Both Accsys and Eastman remain fully committed to delivering the project,which will replicate the proven technology of our successful Accoya plant in Arnhem.FY23 has been another important year for customer relationships,during which we have had to manage inflationary cost increases through higher prices,ongoing disruption to supply chains post the COVID-19 pandemic and our own production capacity limit in the face of strong customer demand.We are grateful to our customers for their continued support and have engaged in regular dialogue with them as we navigate these challenging market conditions.During the year Accoyas high level of performance and sustainability was recognised in several prestigious global industry awards.Please see page 16 for further details.Summary of financial performanceAccsys delivered revenues of 162.0m,a 34%increase on FY22,reflecting continuing strong demand for our products,higher average sale prices and the implementation of an Energy Price Premium to mitigate higher gas prices.Sales volume grew by 6%during the year to 63,344m3,with H2 volumes of 39,387m3 representing growth of 64%on H1,in excess of our targeted 50%increase.Underlying Group EBITDA was 22.9m,an increase of 120%on the prior year,and ahead of our market guidance of nearly doubling last years EBITDA of10.4m.Group gross margin remained above our long-term target of 30%at 34%,aided by the higher average sales prices outlined above.In addition,we continue to benefit from a partial natural hedge on our acetyls raw materials cost through the sale of our acetic acid by-product,revenues of which grew by 11%in the year to 15.1m.Underlying profit before tax increased by 9.7m to 11.0m.Statutory loss before tax was 67.1m.Net debt increased by 16.9m in the year to 44.1m due to the planned investment into Accoya USA,(29m),capex investments of 29.8m into the Arnhem reactor 4 and Tricoya Hull projects(partially offset by a placing in May 2022 which raised net proceeds of approximately 19m),the reduction in the NatWest loan(9.4m)and EBITDA generation during the year.ACCOYA SALES VOLUME63,344m3During the year,Accoyas high level of performance was recognised in several prestigious global industry awards.”Laura Keily Head of Marketing FINANCIAL STATEMENTS|Accsys Technologies PLC|Annual Report and Financial Statements 202334OVERVIEWSTRATEGIC REPORTGOVERNANCE35Accoya During the period we were pleased to complete the expansion of our plant in Arnhem which adds a new 20,000 cubic metres reactor,enabling the sites maximum annual capacity to increase to 80,000 cubic metres.As previously reported,we experienced some unexpected delays in the final installation,tie-ins and supply of certain equipment for reactor 4,which resulted in an unexpected second shutdown across the plant in April and May 2022.In addition,during the commissioning and testing period in June,we identified a number of defects to equipment which were repaired over the following eight weeks.As a result,reactor 4 commenced commercial operation in September.Further work on optimising reactor 4 to reduce cycle times and deliver more capacity is planned for the coming year.In addition,investment in new stacking technology is ongoing which will provide efficiency improvements across the plants workcentres.North America represents the largest potential regional market for our product.Under our joint venture with Eastman,a world leader in the production of acetyls,we are building an Accoya plant in the USA with an initial approximate 43,000 cubic metres capacity at Eastmans Kingsport,Tennessee site.Under the joint venture,Accsys holds a 60%interest and Eastman a 40%interest.We have made excellent progress with the construction of the plant,which commenced in April 2022.Key milestones include the completion of ground works,ongoing steelwork and main warehouse construction,installation of the reactors on site,placement of multiple large sub-contracts and procurement of more than 80%of major equipment.As we move towards completion of the plant,we will increase our investment in people and infrastructure in readiness of start-up and as a result,the project will incur higher losses in the coming year.As announced in May,the project has experienced some delays related to mechanical completion,as well as the impact of cost inflation.Both joint venture partners continue to be fully engaged in delivering this strategically important project,which will replicate the proven technology of our successful plant in Arnhem.In line with our group commitment to Health&Safety,this has been established as a key priority at the site and by the FY23 year end we were able to celebrate over 150,000 hours worked with only one minor first aid injury.Our 50,000 square foot Accoya Color manufacturing plant in Barry,Wales,has increased our ability to convert Accoya wood into Accoya Color a product which combines the benefits of Accoya wood with colour all the way through the wood from surface to core.The site has an maximum capacity of 12,500 cubic metres perannum.During the year we made operational improvements to the site which enabled us to increase production by 140%to 4,010 cubic metres in FY23.More importantly,this will allow us to further increase future production in FY24 and to support growing customer demand.Accoya Colors unique proposition is proving to be very attractive to customers in our target markets,particularly in the decking category where the surface-to-core grey colour requires less maintenance to retain over the long term.In addition to the products existing markets of Germany,Switzerland,Austria and US,Accoya Color was launched this year into the new markets of Australia,New Zealand and France.Accoya Color generates a higher gross profit per cubic metre than Accoya and will enhance our product margins over time.As we increase our Accoya production capacity,we continue to expect increased Accoya Color sales in the medium term.Business Review continuedStrategic Update PACIFIC COAST HOME FEATURES ACCOYASan Diego,CA,United StatesAccoya wood,known for its durability and resistance to warping,was the ideal choice for a Pacific Ocean residence designed by Greg Coleman Architects.The project aimed to create a beautiful,long-lasting space for the homeowners to enjoy the stunning ocean views.The architects used approximately 1,900 square feet of Accoya wood that was milled into 22 slats.The slats were installed as a privacy screen around the second floor decks and for the railing at the exterior stair for the ADU.Accoya woods stability and resistance to warping made it an ideal material for the 22 slats,as other cladding options,such as Ipe,would have been more challenging to work with.CASE STUDYAccoya wood was chosen as it met the projects goals of creating a beautiful and durable outdoor space.Due to its durability,Accoya wood requires less maintenance and refinishing,which made it a cost-effective and practical choice for the project.The installation was completed by California Deck Pros,who did an excellent job creating a beautiful and functional outdoor space.RGB Inc.served as the general contractor for the project and oversaw theinstallation.The project was honoured with the award for Residential Project of the Year 2022 by AIA San Diego.Accoya cladding Architect:Greg Colman ArchitectsInstaller:California Deck ProsGeneral Contractor:RGB Inc.AWARD WINNING PRODUCT DETAILSFINANCIAL STATEMENTS|Accsys Technologies PLC|Annual Report and Financial Statements 202336OVERVIEWSTRATEGIC REPORTGOVERNANCE37Image by FINSABusiness Review continuedBuilding Organisational CapabilityWe are making good progress in developing our people and organisational capabilities to manage growth.As we increase our manufacturing output,we are strongly focused on strengthening our manufacturing expertise and leadership.Key senior management appointments during the year include a Group Manufacturing and Projects Director,a newly created role which will support Accsys as we expand our operations and develop our global reach.Management has also been strengthened by the appointments of new Managing Directors of Tricoya UK and Accoya Color.Post the year end,the Company has also boosted its expertise in the areas of large capital project management,cost management and financial forecasting through the appointments in April 2023 of a new CEO and CFO,both of whom have significant experience in these areas.For full details of these key appointments,please see page 16.We rely on the skills,experience and commitment of our people to meet our business goals and to that end,are committed to investing in their careers.During the year we increased the number of training and development opportunities for our colleagues around the Group,providing 8,579 total training hours in FY23,representing 32.5 training hours per colleague.This years performance is an increase of 526 hours on the prior year and 4,619 hours since FY21.Together with new leadership training programmes and talent mapping,this is an ongoing process to ensure we have the right skills and talent in place to grow our business effectively.Innovation&TechnologyWe conduct regular strategic reviews of our engineering and technology capabilities and other actions to drive improved delivery of capital and innovation projects.This led to the creation in FY22 of a Global Engineering Centre and Project Management Office,and further development of our R&D function.During the year,we increased our skills and talent in key areas including project and portfolio management in addition to engineering,wood(modification)science and analyticalcapabilities.Our R&D team is focused on both process and product innovation which impact the short,medium and long-term future of the business.With production capacity recently expanded in Arnhem,process optimisation and reliability remain core areas of focus.Our R&D team works closely with our Sales&Marketing teams to understand evolving consumer needs and to assess where innovation can meet those needs.To build resilience and mitigate risk in our supply chain,our R&D and supply chain teams have been exploring alternative wood species to Radiata pine.The properties of Radiata pine from certain regions make it well suited to our proprietary acetylation process.It is also fast growing and available from certified sources,making it a sustainable choice.However,we want to broaden our wood supply,both in terms of species and source location to de-risk our operations as we grow.The reorganisation gives Accsys the option to take the Tricoya Hull Project forward on its own terms and to benefit from 100%of the long-term returns from Tricoya,including any future licencing in respect of the global Tricoya market opportunity.At the same time,the Company announced the restructuring of the debt arrangements between TUK and NatWest,resulting in the principal debt being reduced by 9.4m to 6.0m with a new seven-year term,and no capital repayments during thisperiod.TricoyaAccsys and its former consortium partners in Tricoya UK Limited(TUK)have been building the worlds first Tricoya plant in Hull.In November 2022,Accsys agreed with its partners Ineos,MEDITE,BGF and Volantis to acquire 100%ownership of the plant and the Tricoya Group entities(Tricoya Technologies Limited and TUK),in exchange for 11.9m new shares in Accsys,representing 5.74%of its issued share capital at that date.Ineos and MEDITE remain commercial partners with Accsys,retaining their respective acetyls supply and acetylated wood chip off-take agreements.Strategic Update continuedThis year we were pleased to see positive results from long-term trials of Accoya made from fast growing Taeda pine from Argentina and Uruguay with ideal growing conditions and forestry practices and mills that can meet our requirements.For example,Accoya cladding made from Taeda has been used to clad the Starbucks building in Wakefield,UK.Installed in 2020,it has shown the same durability and performance as Radiata pine.Being able to source Taeda from South America also makes it an ideal option for supply to the Kingsport,Tennessee plant.Over the coming year,we will be continuing this work with the view to beginning official commercial production of Accoya withTaeda.Accsys produces acetic acid as a by-product of its wood acetylation process.This Accsys acetic acid has been proven to be of good quality and of low environmental footprint.For years,Accsys acetic acid customers have recognised these qualities and proven that it can be used,undiluted or diluted,for many standard acetic acid applications,e.g.in water treatment or as chemical raw material for solvents like acetic anhydride.However,it does have some differences to glacial acetic acid(notably,a slightly lower purity with some content from wood extractives or slightly higher colour).To address these differences,Accsys acetic acid from wood acetylation can be further purified in order to reach a quality equivalent to standard glacial acetic acid.This purified acetic acid can be used with almost no restriction in most glacial acetic acid markets/applications(e.g.in Vinyl Acetate,Acetic Anhydride,Mono Chloro Acid,Pure Terephthalic Acid,Butyl or Ethyl Acetate).The Company stopped site activity in November,placing the project into a hold period to mitigate the risk of weaker economics on start-up(due to the high and volatile acetyls raw material prices in Europe)and to allow the Board time to assess the economics and capability of the plant and its potential returns oninvestment.While further work is required to prove the working capabilities of the plant,we have made significant and positive progress on this review over the past six months.Please see further details on progress with the Boards review on page 14 of the Executive Chairs Statement.FINANCIAL STATEMENTS|Accsys Technologies PLC|Annual Report and Financial Statements 202338OVERVIEWSTRATEGIC REPORTGOVERNANCE39 THE RISE OF THE CRESCENDO SERIESOuray,Colorado,United StatesAward winning artist Cie Hoover created the first of many inspirational sculptures out of Accoya wood.In 2020,Cie had a wood-based sculpture titled Balance in the Fray permanently installed in a covered setting in the town of Alamosa,Colorado.From there,he wanted to continue to explore the realm of public art and set out on a quest to find a wood suitable for outdoor installationsand thus came across Accoya.Crescendo stands at roughly nine feet tall and is now installed in the town of Fraser,Colorado.(Photo shown is from a temporary installation of the sculpture for Telluride Art Architecture in July of 2022).A second,even larger version of the sculpture is currently being created,and will permanently reside in the town of Ridgway,Colorado.CASE STUDYBusiness Review continuedBuilding on our commitment to transparency,Accsys participated for a second consecutive year in the S&P Global Corporate Sustainability Assessment.Accsys scored 43/100 an improvement of five points(13%)on the prior year,placing the Company in the top quintile in the Paper&Forest Products industry category.Through our expanding safety programme,which includes increased monitoring,a defined strategy and increasing awareness,we are building a stronger safety culture across the organisation.During the year,the Company rolled out a number of dedicated safety learning programmes and initiatives,including a Health&Safety month in February 2023 which gave our colleagues the opportunity to participate in group discussions on safety improvement,training sessions and guest speakerevents.During the year,we completed a Board performance evaluation and internal review which complements our three-yearly cycle of external evaluations.The results of the evaluation confirmed the individual and collective commitment and effectiveness of Directors.The evaluation also supports the Board in understanding areas of focus as part of its continuous improvement.Health&Safety(HSE)Health&Safety is a top priority for the Board and for Accsys,and the Board-level HSE Committee,established in 2022,has helped support the Boards focus on this key area.Accsys has set Zero Harm as a key target for our operations and is committed to developing best practice HSE across the Company.During FY23,we held regular safety briefings for all colleagues and have issued monthly communications to encourage greater awareness of safety.As awareness around safety grows,we have seen corresponding improvements in key HSE performance metrics.During the year,we introduced a digital version of our safety observation card,submissions of which grew from 1,060 in FY22 to 1,316 this year.In addition,we have maintained our momentum in leadership safety tours,holding almost 700 tours over the year.We are pleased to report that our Total Recordable Incidence Rates improved from 5.2 to 3.6 per 200,000 hours worked.Our Lost Time Incident Rate per 200,000 hours worked,however,increased from 0.52 to 0.96(versus our target 0.5).Energy&Climate ChangeOur approach to Energy&Climate includes a focus on energy efficiency and process optimisation,assessing the carbon impact of our products and integrated climate considerations and activities across multi-functions across the business.We are innovating to minimise our environmental impact across our operations,in accordance with our Climate Change Policy,whilst sourcing our raw materials responsibly.In 2023,we established a steering committee at our Arnhem site to focus on carbon intensity reduction per cubic metre of Accoya produced.Additionally,we are using our Scope emissions data to set carbon reduction targets in alignment with the Science Based Targets initiative(SBTi).Scope 1 and 2 emissions can be seen on page 62.Intellectual PropertyAccsys continues to invest in developing and protecting its valuable portfolio of intellectual property and confidential information.Our technology covers not only the physical equipment and engineering that underpins our manufacturing and production,but also the processes and methodology we follow in our supply and production chain:from the way we source our wood,through our wood modification process,to the way we market and sell Accoya and Tricoya.Accsys holds c.388 patent family members covering 28 distinct inventions in 45 countries with 75%of the patent family members now granted.The core technologies associated with our current and future plants for the production of Accoya and Tricoya wood products are protected by using a combination of patenting and trade secrets to maintain our differentiation in the marketplace and interest to potential licencing partners.Our principal trademark portfolio covers our Accoya and Tricoya brands,the Trimarque device and the Accsys company name,protected by registrations in over 60 countries.ESGWith its stated purpose of Changing wood to change the world,Accsys is committed to growing and operating its business in a responsible and sustainable way.Aligned with our values and business strategy,our ESG framework outlines 10 key material issues and impact areas on which we are primarily focused.Having completed Stage One of our 2020 sustainability strategy roadmap,we are now in Stage Two and are focused on establishing specific development plans,including setting Science Based Targets(SBTs)to reduce our emissions intensity per cubic metre of Accoya produced.Art can be expensive and is not always accessible to many individualsthis is why public art is so important.It allows art to be accessible to EVERYONE.”Cie HooverArtistFINANCIAL STATEMENTS|Accsys Technologies PLC|Annual Report and Financial Statements 202340OVERVIEWSTRATEGIC REPORTGOVERNANCE41Accoya window and doors,Brighton,United KingdomZahBuiltSustainable&Quality ProductsWe are committed to a more sustainable world and use abundantly available wood sources,certified as sustainable by the FSC.Our commitment to responsible sourcing and manufacturing is recognised by leading accreditation bodies.This year we achieved Cradle to Cradle(C2C)gold certification for Accoya Color Grey,as well as being awarded Platinum level(the highest level)for both Material Health and Water Stewardship.Our core product,Accoya,has held C2C certified status since 2010.C2C certification is the global standard for products that are safe,circular,and responsibly made.Accoya wood is one of the very few building products to have acquired C2C certification on the stringent Gold-level.This represents very high standards of sustainability,alongside the recognised high performance and durability credentials of the brand.Board UpdateThe Boards composition brings depth and a range of experience to Accsys,both supporting and challenging the Executive team in the execution of the Companys strategy.The last 12 months has seen considerable change,with Rob Harris,Accsys Chief Executive Officer,stepping down after three years,and Will Rudge deciding to leave the Company after 12 years as Finance Director.Rob Harris is succeeded by Dr Jelena Arsic van Os,who will become Accsys Chief Executive on 1 July 2023,at which point Stephen Odell will return to his prior role as Independent Non-Executive Chair ofAccsys.Jelena has over 20 years experience in senior executive leadership roles in large-cap multinational companies and has a proven track record in transforming and driving complex businesses,delivering on profitable growth targets and successfully delivering large capital projects.Will Rudge is succeeded by Steven Salo,who joined Accsys on 1 April 2023 as Chief Financial Officer.Steven brings significant experience in senior financial leadership roles,executing high-value corporate and business development transactions,and driving and shaping businesses for profitable growth.Post the year end,in May 2023 the Company announced that as they reach the end of their nine-year terms,Sue Farr and Sean Christie,who chairs the Audit Committee,will step down from the Board at the conclusion of the AGM in September 2023.In addition,due to increases in his executive commitments,Alexander Wessels,who chairs the Companys Remuneration Committee,will also step down from the Board at the upcoming AGM.As at the date of this report,the Board is seeking to appoint two new high-quality and experienced Independent Non-Executive Directors,with the intention of one as Chair of the Audit Committee,and the second as Chair of the Remuneration Committee.Business Review continuedSociety&CommunitiesAccsys has developed a more structured approach to charitable and community support and its environmental impact through tools such as charitable giving and colleague engagement.During the year,our colleagues chose three official charity partners to support,pledging total donations of 72,219,and participating in our chosen charities missions through a number of activities,events and presentations.In January,we organised a colleague volunteering day with our charity partner Trees4All.Accsys colleagues were invited to join volunteers from across the Netherlands to plant trees in the Groene Woud,NL.The day resulted in around 2,000 trees going into the ground and gave our colleagues the opportunity to give back to the local community and learn about reforestation.A one-off donation was also approved by our Charities Committee to support the Turkey/Syria Earthquake appeal in support of several colleagues who had relatives and friends in affected areas.Further reading See Our Strategy|Pages 28 to 33See our Sustainability section|Pages 56 to 66See our Finance Review|Pages 44 to 49OutlookIn the coming year,we expect to leverage the benefits from greater economies of scale associated with higher production volumes at our plants.FY24 will also be a year of transition,during which we will implement actions to ensure the future sustainable growth of the business and to drive value creation for our shareholders.These actions include moving towards completion of the Kingsport plant,which will incur higher costs this year as we invest in people and infrastructure in readiness for start-up and making key investments in the core business to support higher volume production.In view of our increased capacity from the expansion of Arnhem and future capacity from Kingsport,and in light of the softening of price and demand in the global construction industry,we are dedicating more resource to our sales and marketing activity globally,particularly in the US,to create more demand as supply becomes available.The Board of Accsys continues to believe in the underlying attractive economics and margins associated with completing the construction of Hull and therefore will continue to explore financing options to fund the plants construction,including strategic partners and lending institutions.Absent the availability of third-party funding,the Company will use modest levels of internally generated cash to maintain the plant and progress the pre-construction works.The Board will continue to engage with stakeholders in respect of Hull and its future prospects.Despite its belief in the future potential for Tricoya,the Board is clear that the base Accsys business must not be compromised to find a solution for Hull.In the meantime,we will continue to work with our partners to develop the Tricoya market using Accoya,including exploring the expansion of dedicated capacity for greater volume production within our existing plants.We have made a good start to FY24,with performance in line with our expectations.With our new executive management team in place to drive the business forward in its next phase of growth,we are confident in delivering further financial and operational progress in the coming year,and in the longer-term demand and growth opportunity for Accoya and Tricoya.FINANCIAL STATEMENTS|Accsys Technologies PLC|Annual Report and Financial Statements 202342OVERVIEWSTRATEGIC REPORTGOVERNANCE432023(44.1)m2022(27.2)m2023 11.0m2023 162.0m2022 120.9mFY23FY22Change%Group Revenue162.0m120.9m34%Gross Profit55.2m36.0m53%Underlying EBITDA22.9m10.4m120%Underlying EBIT14.4m4.2m243%Underlying profit before tax11.0m1.3mStatutory(loss)/profit before tax(67.1m)1.7mCash26.6m42.1m Adjusted cash16.8m4.3mNet debt(44.1m)(27.2m)Accoya Sales volume63,344m359,649m36%Finance ReviewIntroductionAccsys has delivered a good performance in the year,with 34%revenue growth and a 120%increase in Underlying EBITDA to 22.9m,driven by increased sales prices and strong ongoing demand for ourproducts.Net debt increased by 16.9m in the year to 44.1m due to the planned investment into Accoya USA,(29m),capex investments of 29.8m into the Arnhem reactor 4 and Tricoya Hull projects(partially offset by a successful placing in May 2022 which raised net proceeds of approximately 19m),the reduction in the NatWest loan(9.4m)and EBITDA generation during the year.In November 2022,Accsys agreed to acquire full ownership of the Tricoya entities,including the Tricoya Hull plant from its consortium partners for a consideration in Accsys shares(valued at 9.5m).At the same time,the debt facility between TUK and NatWest was restructured,resulting in the principal debt being reduced to 6m,with a new seven-year term and no capital repayments during thisperiod.Following these events,an impairment assessment was required to be performed under IAS 36(Impairment of Assets)on the Tricoya segments gross assets with an impairment loss of 86m being recognised as non-cash exceptional item.The calculated impairment was impacted by:(1)A previously reported increase in the capex to complete the construction of the Tricoya Hull plant of 35m,commencing in 2years;(2)A higher pre-tax WACC rate (used for the discount rate)increasing by 3.0%to 13.5%principally due to higher market interest rates;and(3)A decrease in the production volume forecast for the plant to 24,000MT(from 30,000MT).Statement of comprehensive incomeGroup revenue increased by 34%to 162.0m for the year(FY22:120.9m),driven by continuing strong market demand for Accoya and Tricoya and an increase in average sales prices during the year and prior year implemented to address rising raw material costs.An energy price premium(surcharge)was also successfully added to customer sales prices in H1 to offset asignificant increase in acetyl costs.Accoya sales volumes increased 6%to 63,344m3 following the successful commissioning and operation of reactor 4 in September 2022.We have continued to see strong underlying demand for Accoya across our regions and with our Tricoya panel manufacturing partners.The FY23 regional sales trend on a year-on-year basis reflects a 10%increase in sales volumes in North America,where we continue to increase marketing,sales,and allocation of product volumes available to customers as we develop this market ahead of our US capacity expansion.Sales volumes increased by 18%to our Tricoya customers(MEDITE and FINSA)following a drop in allocation in FY22.These sales to MEDITE and FINSA for the manufacture of Tricoya panels are used to develop the market for Tricoya products and represent 24%of Accoya sales volumes(FY22:22%).Other Revenue,which predominantly relates to the sale of our acetic acid by-product,increased by 21%to 16.8m(FY22:13.9m)due to higher acetic acid sales volume following the ramp up of production from reactor 4 in Arnhem.Accsys sales of its acetic acid by-product back into the same acetyls market continued to act as a partial hedge to the higher acetic anhydride costs.The net acetyls cost increased by 19%compared to the prior year.Raw wood input costs were moderately higher although more stable than the wider lumber market as we purchase appearance-grade wood under long-term supply contracts with many of our partners.Cost of sales increased by 26%,on 6%higher sales volumes and higher cost of raw materials,primarily in higher raw wood and acetic anhydride costs.Group gross profit of 55.2m was 53%higher than the prior year (FY22:36.0m)and gross profit margin increased 4 percentage points to 34%.GROUP REVENUE 162.0m 34%UNDERLYING PROFIT BEFORE TAX11.0m 9.7mNET DEBT(44.1)m 16.9mAccsys delivered a good performance in the year,with 34%revenue growth and a 120%increase in Underlying EBITDA.”Steven SaloChief Financial OfficerSales volume by end marketFY23 m3FY22 m3Change%UK&Ireland 14,667 14,905(2%)Tricoya 15,193 12,860 18%Rest of Europe 16,584 16,809(1%)Americas 10,574 9,575 10%Rest-of-World 6,326 5,500 15%Total63,34459,6492022 1.3mFINANCIAL STATEMENTS|Accsys Technologies PLC|Annual Report and Financial Statements 202344OVERVIEWSTRATEGIC REPORTGOVERNANCE45Finance Review continuedUnderlying other operating costs(excluding depreciation and amortisation)increased from 25.4m to 31.6m.This is due to Tricoyas ongoing running costs being treated as operating expenditure in the second half following the introduction of Tricoya UKs hold period and increased legal,insurance and staff costs during the year.Depreciation and amortisation charges increased by 2.1m to 8.3m following commercial production from reactor 4 in September 2022.Underlying finance expenses increased 0.3m to 3.2m following the interest on Tricoya UKs NatWest facility not being capitalised post the introduction of the hold period for Tricoya UK and a full year of interest cost on the De Engh 10m loan which was entered into March 2022.An impairment loss(exceptional item)of 86.0m has been recognised in the year relating to the Tricoya segment.The calculated impairment is described in the Introduction and has been recognised as a non-cash exceptional item.In regard to the Tricoya Consortium reorganisation completed during the year,the following exceptional items have been recognised:1.5m expense for advisory feesincurred;9.4m income related to the restructuring of the NatWest loan,decreasing the principal debt from 15.4m to 6m;and 1.4m expense related to the value recovery instrument provided to NatWest,allowing NatWest to recover up to approximately 9.4m,on a contingent basis,depending on the profitability of the Tricoya Hull plant once operational(see note 23).An exceptional foreign exchange gain of 1.4m was recognised related to US dollars held as cash for investment into Accoya USA,which were invested into the joint venture in the first half.Following the May 2021 capital raise,the amount raised to invest into Accoya USA was translated into US dollars and held in cash,ensuring that foreign exchange movements did not decrease the amount raised below the future US dollar investment into Accoya USA.This treatment did not meet the requirements for hedge accounting under IFRS 9,Financial Instruments,and therefore the foreign exchange gain on the revaluation of the US dollars has been accounted for in Finance Expenses as an Exceptional item.In the prior year,redundancy costs of 0.1m were recognised in relation to the purchase of assets in Barry,UK and 1.6m early termination costs related to the refinance of the Group debt facilities in October 2021,with both classified as exceptional items.No other adjustments have been recognised in the current year,which were previously also excluded from underlying results.These other adjustments related to foreign exchange differences on the US dollar cash pledged to ABN Amro for the Letter of Credit provided to First Horizon Bank(FHB)as part of the Accoya USA funding arrangements and Pound sterling loan notes repaid in the October 2021 Group refinance.See note 5 for further details.Underlying profit before tax increased by 9.7m to 11.0m(FY22:1.3m).After taking into account exceptional items(including the impairment loss)and other adjustments,loss beforetax amounted to 67.1m(FY22profit:1.7m).The tax charge increased by 1.8m to 2.8m(FY22:1.0m).Underlying earnings per share increased to 0.05 per share (FY22:0.01 per share).A statutory loss per share was recognised of 0.19 per share(FY22:profit of 0.01 per share).Cash flowCash flows generated from operating activities before changes in working capital increased by 11.3m to 22.7m(FY22:11.4m),reflecting continued good operational cash flow generated by our plant in Arnhem.Inventory levels increased by 9.6m during the year with higher raw material levels held due to the ramp up of the fourth reactor,which increases production capacity by 33%but which was also partially impacted by the delay in start-up of reactor 4 and the long lead time for raw material purchases from New Zealand.Inventory balances started to decrease in H2 and are expected to continue to decrease further in the next financial year.In May 2022,Accsys completed a successful placing for an issue of shares in the Company,raising net proceeds of approximately 19.0 million which have been used to strengthen the Groups balance sheet,increase liquidity headroom and provide additional working capital and fund additional costs to complete Arnhems expansion project.At 31 March 2023,the Group held cash balances of 26.6m,a 15.5m decrease in the year,attributable to construction costs relating to the Arnhem plant expansion project(7.9m),Tricoya Hull project(20.1m),the planned investment into Accoya USA(29m)and the increase in inventory referred to above.This was partially offset by the placing,10.0m of proceeds from loans(explained further below),and cash flow generated from operatingactivities.MOVEART CHOOSES ACCOYA FOR SCULPTURELondon,United Kingdom To create a sense of peace and inspiration in a densely populated area,leading manufacturers moveART designed these Accoya wood sculptures,which have successfully brightened up Nine Elms in London.The regeneration of Battersea Power Station,located in Nine Elms,opened its doors in late 2022,attracting people to visit its shops,restaurants,and other attractions for the first time.Therefore,the tranquillity the moveArt sculpture brings is more essential than ever,specifically for the increasing number of residents in the Nine Elms area.moveART is a Swiss company established by designer Norbert Roztocki,who is passionate about keeping people physically and mentally healthy,especially in overpopulated urban areas.moveArt does this by providing art,functionality,and security to public spaces that integrate and inspire people.Roztocki specifically chooses Accoya sustainable wood for all sculptures due to its exceptional durability and stability and the all the sustainability benefits that come with such a high-performance wood.Swiss moveArt sculptures is another example of AccoyamoveART.CASE STUDYFor more Accoya projects go online to| STATEMENTS|Accsys Technologies PLC|Annual Report and Financial Statements 202346OVERVIEWSTRATEGIC REPORTGOVERNANCE47Group Underlying EBITDA 2019-2023 millionFY19FY21FY22FY23FY200.9m7.0m10.1m10.4m22.9mFinance Review continuedWhen adjusting for the cash pledged for the Letter of Credit provided to FHB of$10.0m(see note 30),and in the prior year adjusting for the remaining cash raised in the May 2021 equity raise to be invested into Accoya USA,Adjusted Cash increasedduring the year to 16.8m(see note30).Financial positionPlant and machinery additions of 21.4m(FY22:41.0m)consisted of the construction of reactor 4 in Arnhem and the Tricoya plant in Hull.Trade and other receivables increased to 18.1m(FY22:16.9m),primarily due to higher sales following the ramp up of reactor 4.Trade and other payables decreased 4.0m to 25.9m(FY22:29.9m),with a decrease in accruals following the completion of the Arnhem expansion project and the decrease in activity on the Tricoya plant in Hull.Amounts payable under loan agreements increased to 65.9m(FY22:64.0m)due to the drawdown of 5.0m on the ABN Revolving credit facility and 5.0m on the Tricoya NatWest 17.2m facility,capitalisation of interest on the Tricoya NatWest loan before the Tricoya NatWest facility was restructured,decreasing the principal debt from 15.4m to6.0m.Net debt increased by 16.9m in the year to 44.1m(FY22:27.2m)due to capex investments of 29.8m,investment into Accoya USA(29m)and the increase in inventory partially offset by the successful placing(net proceeds of 19.0m),cash flow generated from operating activities and the restructuring of the Tricoya NatWest facility,decreasing the principal debt on the facility by 9.4m to 6.0m.Going concernThe consolidated financial statements are prepared on a going concern basis,which assumes that the Group will continue in operational existence for the foreseeable future,and at least 12 months from the date these financial statements are approved.As part of the Groups going concern review,the Directors have assessed the Groups trading forecasts,working capital requirements and covenant compliance for the foreseeable future under a base case scenario,taking into account the Groups financial resources including the current cash position and banking and finance facilities which are currently in place(see note 30 fordetails of these facilities).The Directors have also assessed a severe but plausible downside scenario with reduced sales volumes and lower gross margin,also reflecting the possible impact of volatile raw material costs.These forecasts indicate that in order to continue as a going concern the Group is dependent on achieving certain operating performance measures relating to the production and sales of Accoya wood from the plant in Arnhem with the collection of on-going working capital items in line with internally agreed budgets.In both scenarios,the Directors have assumed no commitment will be made to complete the construction and start-up of the Tricoya plant in Hull until appropriate funding arrangements have been put in place.The Directors have taken into account the reorganisation of the Tricoya consortium and restructuring of its bank debt completed in November 2022 which resulted in Accsys becoming the 100%owner of the Tricoya Hull plant and the commitment to fund ongoing working capital during the hold period.The Directors have also considered the possible amount and timing of capital expenditure required to complete the Accoya plant in the USA,noting that notwithstanding that the construction project benefits from certain contractual measures in place with the lead construction contractor,Accsys has committed to fund its 60%share of cost overruns,should they arise.The Directors believe there are a sufficient number of alternative actions and measures within the control of the Group that can and would be taken in order to ensure on-going liquidity including reducing/deferring costs in some discretionary areas as well as larger capital projects if necessary.The Directors believe that while some uncertainty always inherently remains in achieving the budget,in particular in relation to market conditions outside of the Groups control,under both the base scenario and severe but plausible downside scenario,there is sufficient liquidity and covenant headroom such that there is no material uncertainty with respect to going concern and have prepared the financial statements on this basis.Steven SaloChief Financial Officer26 June 2023Accoya cladding,Villa Harmony,Ibiza,Balearic Islands,SpainFINANCIAL STATEMENTS|Accsys Technologies PLC|Annual Report and Financial Statements 202348OVERVIEWSTRATEGIC REPORTGOVERNANCE49Risk ManagementHOW WE IDENTIFY,EVALUATE AND MITIGATE RISKSGlobal companies continue to face significant headwinds,and identifying,evaluating,managing and mitigating risk remains an essential corporateactivity.Risk governanceAt Accsys,the Board is ultimately responsible for risk management.Ongoing risk assessment is delegated to the Audit Committee which seeks to ensure that Accsys risk processes remain focused and robust.The Audit Committees terms of reference ensure it has the capability and structure to operate independently of the Accsys executive team,specifically:the Committee is required to have a particular focus on Accsys processes for the management of business and financial risk;Committee members should have the ability to understand key business and financial risks and related controls and control processes;the Committee is entitled to obtain,at Accsys expense,independent legal,accounting or other professional adv
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2023 RESULTS2DISCLAIMER2023 ANNUAL RESULTSThis presentation is for information purposes only and does not constitute an offer or solicitation to sell or buy instruments,part of thecompany or the assets described here,in the US or any other country.This presentation contains forward-looking statements or information.While EDF believes that the expectations reflected in theseforward-looking statements are based on reasonable assumptions at the time they were made,these assumptions are fundamentallyuncertain and imply a certain amount of risk and uncertainty which is beyond the control of EDF.As a result,EDF cannot guarantee thatthese assumptions will materialise.Future events and actual financial and other outcomes may differ materially from the assumptionsused in these forward-looking statements,including,and not limited to,potential timing differences and the completion of transactionsdescribed therein.Risks and uncertainties(notably linked to the economic,financial,competition,regulatory and climate backdrop)may include changes ineconomic and business trends,regulations,as well as those described or identified in the publicly-available documents filed by EDFwith the French financial markets authority(AMF),including those presented in Section 2.2“Risks to which the Group is exposed”of theEDF Universal Registration Document(URD)filed with the AMF on 21 March 2023(under number D.23-0122),which may be consultedon the AMF website at www.amf-france.org or on the EDF website at www.edf.fr and the activity report at December 31,2023,availableonline on the EDF website.EDF and its affiliates do not undertake nor do have any obligation to update forward-looking information contained in this presentation toreflect any unexpected events or circumstances arising after the date of this presentation.32023 ANNUAL RESULTS Luc RmontChairman and Chief Executive Officer42023 ANNUAL RESULTS2023,OPERATIONAL RECOVERY,SUPPORTING CUSTOMERS AND PREPARATION FOR THE FUTURE4 Launch of a new commercial policy Industrialising the performance of nuclear activities around a new organisationGENERATING MORE LOW-CARBON ELECTRICITY AT A COMPETITIVE PRICESIGNIFICANT RECOVERY IN NUCLEAR GENERATION IN FRANCE279.0320.420222023In TWhNEW STAGES IN THE PREPARATION OF THE COMPANY PROJECT 41.4TWhSUPPORTING CUSTOMERS IN DIFFICULT TIMES5(1)Nuclear generation allocation contracts.(2)Customers counted by point of delivery.A customer may have two delivery points.2023 ANNUAL RESULTSSUPPORTING CUSTOMERS TO REDUCE THEIR CARBON FOOTPRINT5 1.5%growth in the customer portfolio(2)to 40.9 million at end-2023CUSTOMER PORTFOLIO IN THE G4 COUNTRIESFrance,United-Kingdom,Italy,BelgiumEDF deploys integrated decarbonisation and energy efficiency solutions in all sectors.The Group encourages energy sufficiency and the electrification of uses for its customersNEW COMMERCIAL POLICY 21%of charging stations rolled out or managed in 2023 vs 2022(340,000 charging stations at end-2023)ELECTRIC MOBILITYAuctions of electricity volumes 4 and 5 years aheadCommercialisation of medium-term power supply contractsDevelopment of long-term industrial partnerships(1)backed by the historic nuclear fleetTargets:sustainable competitiveness and visibility for customersCO2emissions avoided by the customers in 2023 vs 2022(in mt CO2)USES DECARBONISATIONStrategic partnership to reduce by 35rbon emissions from the real estate portfolio of La Poste by 2030(Dalkia,EDF ENR,Izivia et Urbanomy) 30%of heat pumps installed in 2023 vs 2022 in France byIzi Confort,Izi by EDF,Dalkia and EDF ENR 60%solar installations on rooftops and car park canopies(BtoC and BtoB)in 2023,i.e.,740MWp installed by EDF ENR at end-202311.412.43020222023203062023 ANNUAL RESULTSPRODUCING MORE LOW-CARBON ELECTRICITY(1/4)NEW AMBITIONS OF REDUCTION IN CO2EMISSIONS(1)Source:Enerdata,Power Plant Tracker in 2022.(2)EU 27 value in 2022,European Environment Agency.(3)2022 value,IEA-World Energy Outlook 2023.(4)Vs 2017.(5)For the 3 scopes.(6)Net Zero Assessment report512419201611201720222023202520302035Scope 1 emissions(in mt CO2 eq)-60%(4)-70%(4)-80%(4)503730222022202320302035Carbon intensity(in gCO2/kWh)LEADER IN LOW-CARBON GENERATIONTarget:net zero CO2emissions by 2050(5)1stproducer worldwide in carbon-free electricity(1),constantly available on demand and operating on all technologies.1stenergy company investor in decarbonisation through life extension of existing assets and construction of new infrastructureEDF first producer worldwide of decarbonised electricity(1)Carbon intensity of 37gCO2/kWh in 2023,down by 26%vs 2022One of the lowest carbon intensities:More than 6 times European average(251gCO2/kWh(2)More than 10 times 200,0002023 80%electric vehicle charging points connectedEnedis,EDF SEI and lectricit de Strasbourg are transforming their networks to meet the needs of the energy transition,strengthening their resilience,modernising them and digitalising their operation 120%of connections of renewable energy facilities INVESTMENTS 11%of investments vs 2022,to 4.9bn in 2023 for Enedis,EDF SEI(1)and lectricit de Strasbourg,essentially due to the higher number of connectionsMETERS INSTALLED BY EDF SEIMilestone crossed of one million digital meters installed at end-2023(1)EDF SEI Island Energy Systems.Electricity supply restored in 5 days for 95%of customers after the storm CIARN STORM2023 ANNUAL RESULTSDEVELOPING FLEXIBILITY SOLUTIONS TO MEET ELECTRICITY SYSTEM REQUIREMENTSPSHP(1)like the Hatta plant(250MW&1,500MWh of storage in the United Arab Emirates),through an engineering contract:83%complete and start of watering11STORAGESMART CHARGINGPortfolio of storage projects secured:1.7GW at end-2023Significant growth of 0.8GW of new projects secured entering the portfolio in 2023:PSHP of Vouglans Saut-Mortier(87MW-France)Battery projects(o/w the United Kingdom 173MW,Saudi Arabia 130MW,South Africa 257MW) 33%in electric vehicle smart charging points operated(optimised recharging and V2G(2):bidirectional recharging with re-injection into the network)Smart charging solution from DREEV to optimise charging costs and CO2emissions for RATP e-busesLaunch of Izi Smart Charge:smart charging of electric vehicles,depending on network constraints15,00020,00020222023The EDF Group is developing solutions using its generation assets,storage capacities,customer portfolio and innovative flexibility solutions to supply decarbonised electricity at all times(1)Pumped-storage hydropower plants.(2)Vehicle-to-Grid.2023 ANNUAL RESULTS122023 ANNUAL RESULTSSOCIETAL INDICATORSGENDER BALANCEWORK ACCIDENTSREDUCTION IN LTIR(1)SINCE 2021Improvement driven by the deployment of prevention initiatives for EDF and contractor employees29.830.831.733 21202220232026203036%-40%TRAJECTORY IN LINE WITH THE GROUPS AMBITIONSPercentage of women in Group entities management committees(1)Lost Time Incident Rate:number of accidents at work with lost time,per million hours,for EDF employees and contractor empl oyees.2.11.91.720212022202312132023 ANNUAL RESULTSFINANCIAL RESULTS-20231339.9bnEBITDAvs-5.0bn in 202218.5bnvs-12.7bn in 2022Net income excl.non-recurring items10.0bn-17.9bn in 2022Net income Group shareNet financial debt 54.4bnvs 64.5bn end-2022142023 ANNUAL RESULTS Xavier GirreGroup Senior Executive Vice President-Finance2023 ANNUAL RESULTS2023 FINANCIAL RESULTS:PARTIAL REDUCTION IN DEBT1554.4bn-10.1bn vs end-2022Net financial debt(NFD)1.36xNFD/EBITDA ratio86.3bn-8.7bn vs end-2022Adjusted economic debt(AED)(1)2.26xAED/adjusted EBITDA ratio20222023 Sales143.5139.7-3.8EBITDA(5.0)39.9 44.9EBIT(19.4)13.2 32.6Net income excl.non-recurring items(12.7)18.5 31.2Net income Group share(17.9)10.0 27.9In billions of euros(1)S&P methodology.24.76.73.70.90.90.30.40.30.31.34.01.11.90.30.97.13.3 7.0 8.2 7.3 12.1 12.5 2.7-4.9202339.9-23.12023 ANNUAL RESULTS16EBITDA IMPROVED PERFORMANCE AND HIGH PRICESIn billions of eurosNB:Estimated figures for changes in EBITDA.Nuclear generationPurchases on markets in FranceNo renewal of the exceptional regulatory measures for 2022 in France Price effect charged to customers in FranceTrading activities and othersEuropedownstream excluding FrancePrice effect financed by the tariff shield in France-5.02022Other internationalItalyUnited KingdomFramatomeDalkiaEDF RenewablesFrance Regulated activitiesFrance Generation and supply activitiesOther activities17RECOVERY IN FRANCE NUCLEAR OUTPUT ENGAGED 41.4TWh of nuclear output in France in 2023 vs 2022,mainly due to the optimisation and a good management of the stress corrosion treatment works 2023 ANNUAL RESULTS91.7154.1209.2279.085.2158.1233.0320.4Q1H19MFY2022 cumulative output2023 cumulative output-7.0% 2.6% 11.4%(in TWh) 14.8%In billions of euros20222023EBITDA(5.0)39.9 44.9Commodities volatility(0.8)0.4 1.2Amortisation/depreciation expenses and provisions for renewal(11.1)(11.2)-0.1Impairments and other operating income and expenses(2.4)(16.0)-13.6EBIT(19.4)13.2 32.618EBIT2023 ANNUAL RESULTSImpairments in 2023:including,in the United Kingdom,HPC fixed assets for(11.2)bn and EDF Energy goodwill for(1.7)bnNB:The values correspond to the expression to the first decimal or integer closest to the sum of the precise values,taking into account rounding.19NET INCOMEIn billions of euros20222023EBIT(19.4)13.2 32.6Financial result(3.5)(3.3) 0.2Income taxes3.9(2.5)-6.4Share of net income from associates and joint-ventures0.80.3-0.5(-)Deducting net income from minority interests0.32.4 2.1Net income Group share(17.9)10.0 27.9(-)Change in financial instruments&commodities fair value2.9(1.9)-4.8(-)Impairments(1)1.38.3 7.0(-)Other items1.02.1 1.1Neutralisation of non-recurring items net of tax5.38.5 3.2Net income excluding non-recurring items(12.7)18.5 31.2Better performance of Dedicated Asset portfolio: 10.2%vs-8.5%in 2022( 5.6bn)Stability in the real discount rate of French nuclear provisions(2)to 2.5ter the positive impact of 50bp rate increase in 2022(-2.5bn)Coverage rate of nuclear provisions by the Dedicated Assets:108.5%at end-2023,vs 107.1%at end-2022Increase in the cost of financial debt of 2.1bnChange in financial result NB:The values correspond to the expression to the first decimal or integer closest to the sum of the precise values,taking into account rounding.(1)Including 2023 impairments in the United Kingdom related to HPC fixed assets and EDF Energy goodwill for a total amount of(7.9)bn net of tax.(2)Between 31/12/2022 and 31/12/2023.2023 ANNUAL RESULTS64.554.4-43.9 7.8 19.1 2.9 3.7 1.1-2.4 1.631 December 202231 December 20232023 ANNUAL RESULTS20PARTIAL REDUCTION IN DEBTNB:figures rounded to the nearest whole number.(1)Net investments excluding Group disposals.Net financial debt(NFD)in billions of eurosEBITDA Cash WCRNet investments(1)Net financial expenses disbursed&othersIncome tax paidGroup cash-flow: 9.3bnOthersOceane conversion in equityNFD down by 10.1bnHybrid bond remuneration,dividends paid to minority interests Unfavourable change in WCR:Effect of price rise on receivablesEffect of the 3.9bn reduction in CSPE debt,mainly due to the tariff shield receivable,partially offset by the compensations received in 2023Effect on trading activity of 5.1bn(NB:-8.5bn in EBITDA Cash)RAPID DECLINE ON MARKET PRICES 2023 ANNUAL RESULTS21050100150200250300350400450500550600650700Y 1 baseloadY 5 baseloadMax of 1,130/MWh reached in August 2022Forward prices(Y 1 and Y 5)in France(EEX)in/MWh21PROJECTION OF 2024 EBITDA2023 ANNUAL RESULTS2239.9-8 to-11 2 to 520232024Nuclear generationOther effectsEnergy price effectSignificant drop in:market pricesenergy part of the regulated tariffsthe cost of purchases/sales on the marketNuclear production expected to rise in France,leading to lower purchases in a context of lower market pricesIn billion of euros2223OUTLOOKLuc RmontChairman and Chief Executive OfficerCONTEXT FOR THE COMING YEARS242023:recovery in nuclear production,supporting customers and debt reductionOutlook for 2024-2026:Expected fall in electricity market pricesIncrease in nuclear outputHigh level of investment deployed in line with the Groups business modelsOperational excellence2023 ANNUAL RESULTS2023 ANNUAL RESULTS2026 TARGETS252.5xADJUSTED ECONOMIC DEBT/ADJUSTED EBITDA(1)(2)4xNET FINANCIAL DEBT/EBITDA(1)(1)Based on scope and exchange rates at 01/01/2024 and an assumption of French nuclear output,relative to the fleet currently in service,of 315-345TWh for 2024,335-365TWh for 2025 and 2026.(2)As per current S&P methodology on the ratio.Extension until 2026 of the commitment made in July 2023:2024 OUTLOOK26Customers Continuing deployment of the new commercial policyDecarbonised generation Continuing recovery in nuclear generation in France(315-345TWh)Flamanville 3 oNuclear fuel loading and first connection to the grid HPCoContinued ramping up of the worksite EPR2 programme in France oTarget:optimising the design,costing and financing RenewablesoCommissioning of the Fcamp offshore wind farm(500MW-France)oStart of generation of the Nachtigal dam(420MW-Cameroon)EDF partner of Paris 2024,for more responsible and sober Olympic and Paralympic GamesAthletes Village2023 ANNUAL RESULTS2023 RESULTSCOMPLEMENTARY BOOKTABLE OF CONTENTS28P.67ESGP.47CONSOLIDATED FINANCIAL STATEMENTSP.59FINANCING&LIQUIDITYP.29STRATEGIC PROJECTSP.44CUSTOMERS(FRANCE)P.35OPERATIONAL DATAP.70MARKET DATA292023 ANNUAL RESULTS STRATEGIC PROJECTSOperational dataConsolidated financial statementsCustomers(France)Financing&LiquidityESGMarket dataStrategic projectsFLAMANVILLE 3 EPR(1.6GW)(1)See the press release of 16 December 2022.In 2015 euros,excluding interim interest(see note 10.6 of the Consolidated financial statements as of 31 December 2023).(2)SIS=Safety injection system,CHRM=containment heat removal system.302023 ANNUAL RESULTS UPGRADE ON THE MAIN SECONDARY CIRCUIT WELDS AND OTHER MATTERS OF ATTENTIONSCHEDULE AND COSTSThe nuclear fuel loading is scheduled in March 2024,following the successful completion of the tests of the installation at end-2023.EDF expects the French Nuclear Safety Authority(ASN)approval for fuel loading in Q1 2024.The first connection to the grid is scheduled mid-2024The first planned outage,called“Visite Complte 1”,should mainly take place in 2026 and last several months.Its organisation,content and subsequent duration are in developmentThe ASN has agreed with the postponement of the vessel head replacement from 2024 to the planned outage following the first operating cycleThe last estimated completion cost is 13.2bn(1)(excluding costs arising from post-commissioning modifications)At end-2023,all the welds concerned,including the most complex penetration ones,had been upgraded,stress-relieving heat treatments have been completed and the last non-destructive inspection treatments have been finalised.The ASN will issue its final opinion on the main secondary circuits compliance in its Compliance Declaration for the nuclear steam supply systemsOther technical matters have mobilised the teams,in particular the filtration sumps SIS/CHRM(2)(works completed,the ASN has agreed with the strategy proposed by EDF)the pressurizer safety release valves(the new valves have been installed)and the lessons learnt from the technical issue at the Taishan No.1 reactor(mechanical wear on certain assembly components during its second operating cycle).Concerning this last issue,64 new reinforced fuel assemblies have been supplied on site and received the approval of the ASNRisks of deviations in components,equipments or parts of equipments delivered by EDF service providers and suppliers could lead,after analysis and if the deviations were confirmed,to justification or correction of the deviations,and the possibility of a delayed start-up dateOperational dataConsolidated financial statementsCustomers(France)Financing&LiquidityESGMarket dataStrategic projects31HINKLEY POINT C EPR(3.3GW)(1)See EDFs Press Release of 23 January 2024“Hinkley Point C Update”.(2)Excluding interim interest and at a reference exchange rate for the project of 20151=1.23.The range of 31bn to 34bn2015(vs 25 and26 bn2015announced on 19 May 2022)corresponds to the range of 41.6 to 46.5bn in current value(with an additional risk of 1.4bn)FINANCING OF THE PROJECTSCHEDULE AND COST REVIEWCONSTRUCTION PROGRESSProgress in 2023,culminated with the successful lift of the dome onto the Unit 1 Reactor Building,which is now weather-tight protecting the Polar CraneThe detailed design for the next phase of MEH work has been finalised70%of the equipment to be installed on Unit 1 has been deliveredThe first steam generators have been built and are ready for deliveryTesting of the UK instrumentation and control system is underwayConclusions of the last schedule and cost review for the Hinkley Point C project announced on 23 January 2024(1):In terms of schedule,Unit 1 is now expected to start producing electricity around the end of the decade.Several scenarios have been analysed,in which Unit 1 would become operational in:(i)2029,around which the project is organised,based on a target productivity for electromechanical(MEH)work and action plans(ii)2030,the base case scenario which assumes certain risks materialise in MEH ramp-up and testing(iii)2031,unfavourable scenario which assumes a further 12-month risk materialisesThe project completion cost is estimated,in the range of 31 to 34bn2015(2).The range of costs will mainly depend on Main Civil Works and MEH productivity and on compliance with the schedule.If the unfavourable scenario(above)materialises,this could lead to an additional cost of around 20151bnThe commencement operation date(COD)for Unit 2 is targeted 12 months after Unit 1 commissioningThe agreements between EDF and CGN include a compensation mechanism of certain additional costs by EDF in case of overrun of the initial budget or delays.This mechanism was triggered in January 2023.This arrangement is part of a Shareholders bilateral agreement signed between EDF and CGN in September 2016 and is subject to a confidentiality clauseAs the projects total financing needs exceed the contractual commitment of the shareholders,shareholders were asked to provide additional equity on a voluntary basis as from Q3 2023.HPC funding is now through Voluntary Equity,to which only EDF is currently contributingFinancing solutions are being investigated by HPCHowever,given the projects stage of completion,it is highly unlikely that private equity funding can be secured in the short termAt end-December 2023 EDFs share in HPC was 67.7%,with CGN owning the remaining 32.3 23 ANNUAL RESULTS Operational dataConsolidated financial statementsCustomers(France)Financing&LiquidityESGMarket dataStrategic projectsFINAL INVESTMENT DECISION(FID)PROGRESSSIZEWELL C EPR(3.3GW)322023 ANNUAL RESULTS MAIN ASPECTSProject of 2 UK European Pressurised Reactors(EPR)at Sizewell on the Suffolk coast for a total capacity of 3.3GWPower supply to 6 million households for around 60 years Second of a kind UK EPR following Hinkley Point C,replicating as much as possible of the Hinkley Point C design and supply chainThe power plants construction remains subject to the project,approving a FID.FID is subject to the fulfilment of some conditions including:-Securing the project financing(including the finalisation of RAB and GSP and the completion of the capital raise)-An agreement with the UK Government on the baseline cost and schedule estimate at completion-The granting of the remaining required consents,in particular subsidy control clearanceEDFs participation in the financing of the construction is subject to the fulfilment of some conditions including:-A share ownership of the project not exceeding 19.99%-The ability of EDF not to control the project-A return on capital expected by EDF,as an investor in line with its investment policyDevelopment of the ProjectThe Office for Nuclear Regulation(ONR)confirmed in July 2022 that almost all the regulatory requirements were satisfied to grant a Nuclear Site LicenseThe project was granted its Development Consent Order(DCO)by the UK Government in July 2022.Legal action challenging that decision was dismissed in June and December 2023.An application for leave to appeal the Judgement has been filled in January 2024The project has fulfilled a series of obligations in the DCO to enable commencement of worksThe target cost and schedule are being reviewed to take into account the conclusions of HPC schedule and cost update announced in January 2024Financing the constructionOn 22 January 2024,the UK Government announced a further 1.3bn investment which follows its previous commitments already announced(700m in November 2022,511m in the summer 2023).This additional investment will consolidate the UK Government position as the majority shareholder in the project by final investment decision(FID)In September 2023,the UK government launched an equity raise process to secure the capital required for financing the project The financing terms of the project are being discussed with the UK Government and the agreement is expected to be set out in 2024.The project is eligible for funding under the Regulated Asset Base(RAB)model,with a Government Support Package(GSP),the terms of which are being finalisedAt 31 December 2023,the project is owned at 50.6%by the UK government and at 49.4%by EDF.Sizewell C is still fully consolidated in the Groups accounts,but governance can be changed by FIDOrganisationOrganisation and collaboration schemes with Hinkley Point C,are being implemented and tested to secure the benefits of the replication of the Hinkley Point C project Operational dataConsolidated financial statementsCustomers(France)Financing&LiquidityESGMarket dataStrategic projects33MAINTENANCE OF THE EXISTING NUCLEAR FLEET(1)See Press Release of 28 November 2023(2)See Information notes and Press Releases of 16 March 2023 and of 26 April 2023.Most sensitive reactors:the 4 N4 series reactors of 1,450MW and the 12 P4 series reactors of 1,300MW.(3)Cattenom 4 will be inspected during its 10-year inspection which starts in February 2024.2023 ANNUAL RESULTS GRAND CARNAGE PROGRAMME:Industrial strategy to continue the operation of nuclear plants beyond 40 years:-Technical capacity of the plants to operate beyond 40 years supported by international benchmarks for similar technologies-Extension from 40 to 50 years of the depreciation period of the 900MW nuclear fleet from 1 January 2016 and for the 1,300MW nuclear fleet from 1 January 2021-Strategy compatible with the current multi-year energy programme for France(PPE 2018-2023)and the French Law removing the 50p of nuclear power from the energy mix in 2035The second phase of the programme(2022-2028)includes:-Continuation of the 4th ten-year inspection programme for the 900MW reactors-Studies and beginning of implementation for first 4th ten-year inspection for the 1,300MW reactors-Prior studies for the continued operation of 900MW reactors beyond 50 years Total expenses for the 2022-2028 period estimated at 33bn(estimate at 31 March 2022)excluding SC phenomenon.In 2023,total expenses amounted to 4.4bn excluding SC phenomenonSuccess of the first senior green bond issue dedicated to the financing of the existing nuclear fleet,for a nominal amount of 1 billion euros(1)At end-December 2023,among the 16 most sensitive reactors(2)to SC detected in the auxiliary circuits of the main primary circuit:-Sections of pipes replaced on all of the 4 N4 reactors which are in operation-Preventive replacement of impacted lines of 12 P4 reactors:finalised on 11 reactors and during its 10-year inspection for 1 reactor(3)The 40 less sensitive reactors will be inspected by early 2026 during the planned outagesConcerning welds repaired at construction,the 2023 control programme has been finalisedThe SC 2024 programme,which is larger in scope than the 2023 programme,has been validated by the ASN and the inspections will be carried out during scheduled maintenance outagesThe work on stress corrosion leads to an estimated capital expenditure of 1.2bn over the period 2022-2025,of which 0.9Mds had been spent at end-2023STRESS CORROSION PHENOMENON(SC):Operational dataConsolidated financial statementsCustomers(France)Financing&LiquidityESGMarket dataStrategic projects3410-YEAR INSPECTIONS OF THE NUCLEAR FLEET2023 ANNUAL RESULTS 012345678202320242025202620272028202920302031203220332034In 2029,Tricastin 1 would be the first 900MW series reactor to realise its 5th10-year inspection 1,450MW1,300MWNumber of 10-year inspections4th10-year inspection of 900MW reactors3rd10-year inspection of 1,300MW reactors4th10-year inspection of 1,300MW reactors3rd10-year inspection of 1,450MW reactors5th10-year inspection of 900MW reactors(1)BUG3CAT4BLA3PEN2BLA4CHB2PAL1CRU2CAT1GRA6CAT2BEL2CHO2CHO1BEL1CAT3BUG5CIV1GOL1BLA1CIV2BUG3CAT4NB:forecast data on 31 December 2023.(1)Subject to decisions taken and authorisations issued.CHB3BUG2TRI1CHB4900MW 4th10-year inspection900MW 5th10-year inspection(1)GOL2GOL2BLA2DAM3CHB1GRA2SLB2PAL2PAL3SAL1FLA1SAL2FLA2PAL4NOG1NOG2PEN1PEN2CRU3DAM4GRA4TRI4GRA4CRU1GRA5CRU4BUG4TRI2DAM1GRA1DAM2SLB2GRA3BLA2CHB1DAM3GRA2BLA3CRU3DAM4GRA4TRI4TRI3352023 ANNUAL RESULTS OPERATIONAL DATAOperational dataConsolidated financial statementsCustomers(France)Financing&LiquidityESGMarket dataStrategic projects36ELECTRICITY OUTPUTNB:The values correspond to the expression to the first decimal or integer closest to the sum of the precise values,taking into account rounding.(1)Hydro output includes tidal energy for 549GWh in 2022 and 504GWh in 2023.Hydro output after deduction of pumped volumes is 28.2TWh in 2022 and 37.0TWh in 2023.2023 ANNUAL RESULTS Fully consolidated entities (in TWh)20222023Nuclear328.07663.478%Total ENR60.214p.815%Hydro(1)35.659B.860%Wind21.235#.533%Solar2.54%3.25%Biomass0.92%1.42%Gas36.58(.56%Fuel oil5.41%4.61%Coal1.70.4%0.20.1%Group431.7100F7.6100%Operational dataConsolidated financial statementsCustomers(France)Financing&LiquidityESGMarket dataStrategic projectsNB:The values correspond to the expression to the first decimal or integer closest to the sum of the precise values,taking into account rounding.(1)Including direct CO2 emissions(excluding life cycle analysis(LCA)of fuel,production means and other CO2-equivalent gas emissions).The other CO2-equivalent gas emissions are included in the Scope 1 calculation.(2)Power generation in ZNI:Zones non interconnectes corresponding to overseas departments and Corsica-(mainly island territories)and Electricit de Strasbourg(ES).(3)Framatome contributes to 29ktCO2in 2023 and 31ktCO2in 2022,The direct CO2 emissions from“Others activities”segments are not significant compared to Group total emissions and are not disclosed in this table.(4)Carbon intensity corresponds to CO2emissions in relation to the Groups electricity and heat generation,The EDF Groups heat generation amounts to 23.7TWh in 2023(vs 26.0TWh in 2022).37CO2EMISSIONS AND CARBON INTENSITY(1)2023 ANNUAL RESULTS Fully consolidated entities Heat and power generation by segmentEmissions(in kt CO2)Carbon intensity(in gCO2/kWh(4)2022202320222023 France Generation and supply activities5,32723%2,901168France Regulated activities(2)3,35215%2,91716Q2469Dalkia4,12718%3,588206147United Kingdom14910Italy6,84230%6,2633401302Other international3,25114%2,54714!6182Group(3)23,078100,249100P37Operational dataConsolidated financial statementsCustomers(France)Financing&LiquidityESGMarket dataStrategic projectsNB:The values correspond to the expression to the first decimal or integer closest to the sum of the precise values,taking into account rounding.(1)Taking into consideration the shutdown of Tihange 2.(2)Including sea energy:0.24GW in 2023.(3)Taking into consideration the conversion of the Port Est plant(Reunion)to biomass.(4)Taking into consideration the disposal of the Sloe CCGT in the Netherlands.(5)Taking into consideration the closure of the 2 last units of West Burton A.38INSTALLED CAPACITY AS OF 31 DECEMBER 20232023 ANNUAL RESULTS(in GW)Total net capacity of EDF Group,including shares in associates and joint venturesInvestments in associates and joint venturesConsolidated capacity of EDF GroupNuclear(1)67.855%-0.267.958%Hydro(2)22.618%1.021.618%ENR(3)15.112%2.812.310%Gas(4)11.19%-0.211.310%Fuel oil(3)3.23%0.13.13%Coal(5)3.02%1.81.21%Total122.7100%5.3117.3100%Operational dataConsolidated financial statementsCustomers(France)Financing&LiquidityESGMarket dataStrategic projects39FRANCE:UPSTREAM/DOWNSTREAM ELECTRICITY BALANCENB:EDF excluding French islands electrical activities.(1)Hydro output after deduction of pumped volumes:33TWh in 2023/25TWh in 2022.(2)Including hydro pumped volumes of 5.7TWh in 2023/7.4TWh in 2022.2023 ANNUAL RESULTS In TWh 2023vs.2022OUTPUT/PURCHASECONSUMPTION/SALES 2023vs.2022 16.8 16.8In TWh431.2 41.4-4.5-12.2 6.3-0.4431.2NuclearHydro(1)ThermalLT&Structured purchasesPurchase obligationsStructured sales and others(2)ARENH supplyEnd-customers49.715.76.738.7320.4-0.2-19.0234.141.2126.6 6.7Net market sales 29.3 29.3including:Market offers:128.4Regulated tariffs:105.7including: 4.7:Market offers-4.9:Regulated tariffsNet market purchases0.0-13.8Operational dataConsolidated financial statementsCustomers(France)Financing&LiquidityESGMarket dataStrategic projectsFRANCE HYDRO OUTPUT(1)Hydropower excluding electrical activities on French islands,before deduction of pumping consumption.(2)Production after deduction of pumped volume consumption:25.0TWh in 2022/33.0TWh in 2023.2023 ANNUAL RESULTS 9,418.924,932,49,219.426,738,7Q1H19MFY2022 cumulative output2023 cumulative output(2) 19.4vourable hydro conditions in the last two months of 2023 almost offset the overall deficit of the first ten months:hydraulic conditions index of 0.98 in 2023 vs 0.71 in 2022Hydraulic reservoirs filling rate in France at 80%at end-December 2023: 17 points above historical average(63%)(in TWh)40(1)(1)-2.9% 2.2% 7.000000%MarchNormal hydro conditions levelMonthly mins and max between 2013 and 202220222021Dec.Sept.June2023Operational dataConsolidated financial statementsCustomers(France)Financing&LiquidityESGMarket dataStrategic projects41EDF:A EUROPEAN LEADING PLAYER IN RENEWABLE ENERGIESNB:situation at 31/12/2023.(1)Installed capacity shown as net,corresponding to the consolidated data based on EDFs participation in Group companies,including investments in affiliates and joint ventures.(2)Biomass and geothermal.(3)Including sea energy:0.24GW.2023 ANNUAL RESULTS INSTALLED CAPACITY:37.7GW NET(1)A DIVERSIFIED MIX WITH 37.7GW IN OPERATION22.6GW of hydropower14.7GW of wind and solar power0.4GW others(biomass,geothermal,)Leading European producer of hydropowerMore than 400 production sites worldwide2.9GW gross commissioned in 20236.4GW gross currently under construction(1.5GW in onshore wind,1.2GW in offshore wind,3.7GW in solar)A GLOBAL LEADER IN WIND AND SOLAR ENERGYHYDROPOWERCAPACITY BY SECTOR:5.4GW1.3GW27.4GW2.1GW1.4GWCAPACITY BY GEOGRAPHY:9.9GWWIND4.7GWSOLAR POWER0.4GW(2)OTHER37.7GW(net)22.6GW(3)HYDROOperational dataConsolidated financial statementsCustomers(France)Financing&LiquidityESGMarket dataStrategic projects42RENEWABLES:INSTALLED CAPACITY AND CAPACITY UNDER CONSTRUCTION,AS OF 31 DECEMBER 2023(1)Gross capacity:total capacity of the facilities in which EDF has a stake.(2)Net capacity:capacity corresponding to EDFs stake.2023 ANNUAL RESULTS(in MW)Gross(1)Net(2)31/12/202231/12/202331/12/202231/12/2023Wind2,7832,6851,6621,591Solar4,3473,7283,0732,617Capacity under construction 7,1306,4134,7354,209Onshore wind 13,14113,2449,0669,342Offshore wind1,4111,621508581Solar7,4279,4253,5914,734Wind&Solar installed capacity 21,97924,28913,16514,657Biomass and geothermal-232440Renewable(excl.hydro)installed capacity-13,39715,097Hydraulic-22,57722,571Renewable installed capacity-35,97437,668Operational dataConsolidated financial statementsCustomers(France)Financing&LiquidityESGMarket dataStrategic projects43A PORTFOLIO OF WIND AND SOLAR PROJECTS OF 98GW(1)NB:situation at 31/12/2023.(1)Mainly wind and solar.Pipeline excluding capacities under construction.Gross data corresponding to 100%of the capacity of the projects concerned.(2)All the projects in prospection phase included in the pipeline,starting 2020.(3)Start of construction portfolio,not probability-based.2023 ANNUAL RESULTS A PROJECT PORTFOLIO THAT IS DIVERSIFIED GEOGRAPHICALLY AND BALANCED BETWEEN WIND AND SOLAR(in GW)Offshore wind23%Solar49Onshore wind288.1GW7.6GW39.1GW6.2GW6.7GW39%NORTH AMERICA8%LATAM13%REST OF THE WORLD98GW40%EUROPEBREAKDOWN BY DEVELOPMENT PHASE(2)(in GW)*Securing a power purchase agreement(following a call for tenders,auction,OTC negotiation)*Sufficient land securisation and start of technical studies*Start of land identification and preliminary studies98362636Total2024-20252026-2028 2028BREAKDOWN BY DATE OF START OF CONSTRUCTION(in GW)(3)125927Secured*Under development*Prospection phase*98442023 ANNUAL RESULTS CUSTOMERS(FRANCE)Operational dataConsolidated financial statementsCustomers(France)Financing&LiquidityESGMarket dataStrategic projects45FRANCE:DISTRIBUTION OF ELECTRICITY SALES(1)ACCORDING TO THEIR MARKET PRICE EXPOSURE2023 ANNUAL RESULTS Volumes sold at ARENH price following the cost-stacking formula in the regulated sales tariffs(essentially blue residential and non-residential tariffs)and to EDF final customers under market-based contracts(2)Volumes sold at ARENH price(3),which include:the ARENH volumes of 100TWh that can be requested by alternative suppliersThe purchase of losses by network operators for 26.6TWh or at market price if such price is lower than the ARENH arbitration threshold(ARENH price-capacity price)not applicable in 2023Volumes sold at market price,whatever the price,which include:Part of the volumes sold to EDF final customers:“market complement supply”in the regulated tariffs(4),balance of the volumes sold to clients under market-based contractsVolumes sold on wholesale power marketsContracts at negotiated prices that do not follow a market-indexed structure,and hydro pumped volumes of 5.7TWh46TWhat ARENH priceafter cropping126.6TWhat ARENH price:100TWh to alternative suppliers 26.6TWh for network losses64TWhat market price381.1TWh202362eTWhat ARENHprice after cropping60TWhat marketprice (1)Cf.“France:upstream/downstream electricity balance”p.19.Estimated distribution based on the situation in 2023,in particular in terms of EDF downstream market shares.(2)Related to the replication of the sourcing cost structure of alternative suppliers:shares of the volumes corresponding to the ARENH rights”including replication of additional volumes to the alternative suppliers.(3)EDF is subjected to the arbitrage between the two prices and its date of exercise is variable depending on the volumes(it takes place at the latest at the time of the ARENH end of year subscription window for a delivery the following year).(4)Related to the replication of the sourcing cost structure of alternative suppliers:the balancing volumes sourced on the market which exceed the“ARENH rights”.128.4TWhMarketoffers105.7TWhRegulatedtariffs33%5%ARENH drivenMarket prices drivenLong term contracts others20.3TWhLong-termcontractsand othersOperational dataConsolidated financial statementsCustomers(France)Financing&LiquidityESGMarket dataStrategic projects11,516,415,53,673,394110,6125,258,98,95,515,217,216,9185657,161,261,201/08/2022 01/02/202301/08/202301/02/2024Energy fees(5)TURPECapacityCost to serve(4)and marginCatch-up(6)(1)Source:Journal Officiel(2)The figures are based on an average calculation on customers portfolio at the Regulated Sales Tariffs at end-2021 for 2022,and at end-2022 for 2023-2024(latest available database to date).(3)Due to rounding,the total is not strictly equal to the sum of the components.(4)Including cost of Energy Efficiency Certificates.(5)For 2022 and 2023,this part takes into account the tariff shield.In 2023,in particular,this part includes the catch-up under the 2022 cap and a discount of 143.2/MWh from February to July 2023 and of 126.4/MWh from August 2023 to January 2024.This discount is compensated by the CSPE under the finance law for 2023 and will therefore not be subject to a catch-up in 2024.(6)Remaining tariff increase decided in Year-1 but invoiced in Year 1.(7)Excise duty on electricity at 21/MWh excl.VAT on 1 February 2024(cf.decree of 25/01/2024 published in the Journal Officiel of 31/01/2024)46REGULATED SALES TARIFFS IN FRANCE:CHANGE IN 2022-2024RESIDENTIAL EXCLUDING TAXES(1)(2)(3)AVERAGE BILL BREAKDOWN VAT INCLUDED(3)(7)(BLUE RESIDENTIAL CUSTOMER)01/08/2022105136,5151,9152,35657,161,261,21112141,640444801/08/2022 01/02/202301/08/202301/02/2024203.6234.6TICFE/Excise taxTURPEVAT CTA taxesProcurementand commercial costs,net of statecompensation(5)(in/MWh)(in/MWh) 15.0% 31.0/MWh 20.0% 32.5/MWh 9.5% 24.4/MWh 0.18% 0.39/MWh193.6161.1213.1258.1213.5282.5 10.0% 23.5/MWh2023 ANNUAL RESULTS 472023 ANNUAL RESULTS CONSOLIDATED FINANCIALSTATEMENTSOperational dataConsolidated financial statementsCustomers(France)Financing&LiquidityESGMarket dataStrategic projects-23,14424,6676,7233,7079099323334073282551,3253,9671,1151,8553368727,0893,255-133 47,821-3,016 25 76-83 2,668 728 532-3,704Other internationalItalyUnited KingdomFramatomeDalkiaEDF RenewablesFrance Regulated activitiesFrance Generation and supply activities48GROUP EBITDA BY SEGMENT 2023 ANNUAL RESULTSIn millions of euros48Other activitiesOther internationalItalyUnited KingdomDalkiaEDFRenewablesFrance Regulated activitiesFrance Generation&supply activitiesScope&forexFramatomeOther activities(4,986)2022202339,927 Nuclear generation progressive recovery Price effects(o/w market purchases&tariff shield&rise in price) 2022 regulatory measures-Network losses purchases at higher prices-2022 RTE retrocession TURPE price effect Increase in production EBITDA Commercial activity in France and higher cogeneration output-Difficulties on a US contract and punctual decrease in Fuel activity Strengthen margins and market share Higher realised nuclear prices partially offset lower power generation-Sustained performance of EDF Trading in 2023 after an exceptional year in 2022-Lower volumes and prices in gas activities Margin recovery in sales activities Better renewable contribution and gas business optimisation Increase in nuclear&renewable outputs,after energy purchases at high price in 2022,in Belgium Operational dataConsolidated financial statementsCustomers(France)Financing&LiquidityESGMarket dataStrategic projects6,73,7-1.3-1.6 0.7-0.82022202349FRANCE REGULATED ACTIVITIES EBITDA:EXCEPTIONAL PRICE EFFECT ON ENEDIS NETWORK LOSS PURCHASES IN 2023 IN A CONTEXT OF HIGH PRICES2023 ANNUAL RESULTSIn billions of eurosNB:Estimated figures for changes in EBITDA.Price effect on Enedis network loss purchasesRTE 2022 retrocession with no equivalent in 2023,EnedisOtherTURPE price effectOperational dataConsolidated financial statementsCustomers(France)Financing&LiquidityESGMarket dataStrategic projectsIn millions of euros2022current2022non-current20222023current2023non-current2023EBITDA(4,986)-(4,986)39,927-39,927Commodities volatility-(849)(849)-363363Amortisation/depreciation expenses and provisions for renewal(11,079)-(11,079)(11,161)-(11,161)Impairments and other operating income and expenses-(2,449)(2,449)-(15,955)(15,955)EBIT(16,067)(3,296)(19,363)28,766(15,592)13,174Financial result(219)(3,334)(3,553)(5,574)2,225(3,349)Income tax2,9261,0003,926(4,783)2,313(2,470)Share of net income from associates and joint-ventures900(141)759497(240)257Net income of discontinued operations6-6-Deduction net income from minority interests209(494)(285)425(2,829)(2,404)Net income Group share(12,662)(5,278)(17,940)18,481(8,465)10,01650CURRENT AND NON-CURRENT ELEMENTS OF THE P&L2023 ANNUAL RESULTSOperational dataConsolidated financial statementsCustomers(France)Financing&LiquidityESGMarket dataStrategic projects51CHANGE IN FINANCIAL RESULT2023 ANNUAL RESULTS In millions of euros20222023Cost of gross financial debt o/w interest expenses(1,730)(1,940)(3,830)(3,924)(2,100)(1,984)Discount expenses174(3,988)(4,162)Other financial income and expenseso/w net change in fair value of debt and equity instruments of dedicated assets(1,997)(3,096)4,4692,2206,4665,316Financial result(3,553)(3,349)204Excluding non-recurring items before tax(change in IFRS 9 fair value of financial instruments)3,334(2,225)(5,559)Current Financial result(219)(5,574)(5,355)Operational dataConsolidated financial statementsCustomers(France)Financing&LiquidityESGMarket dataStrategic projects52CHANGE IN NET FINANCIAL DEBT2023 ANNUAL RESULTS In millions of euros20222023EBITDA(4,986)39,927Cancellation of non-monetary items included in EBITDA(7,825)3,939EBITDA Cash(12,811)43,866Change in net WCR8,301(7,785)Net investments excluding disposals(16,395)(19,100)Dividends received from associates and joint ventures590702Other elements(1,220)(755)Operating Cash Flow(21,535)16,928Assets disposals53580Income taxes paid(1,282)(3,695)Net financial expenses(1,003)(2,534)Dedicated assets(233)(378)Dividends paid in cash(1,085)(1,113)Group Cash Flow(24,603)9,288Rights issue,hybrids and other monetary changes2,498(64)Change in net financial debt(22,105)9,224Effects of change and exchange rates85(162)Other non-monetary changes IFRS 16(660)(815)Other non-monetary changes1,1681,872Change in net financial debt from continuing operations(21,512)10,119Net Financial Debt Opening balance42,98864,500Net Financial Debt Closing balance64,50054,381Operational dataConsolidated financial statementsCustomers(France)Financing&LiquidityESGMarket dataStrategic projects53CSPE MECHANISM IMPACT ON THE CHANGE IN WORKING CAPITAL REQUIREMENT2023 ANNUAL RESULTS In millions of euros20222023Amount to be compensated to EDF(a):-832-14,139Amount of the support for renewables 3,0972,193Tariff shield-1,571-13,992Others(including ZNI)-2,358-2,340Compensation received by EDF(b)6,60210,010Fiscal debt(c)-1,227231Change in Working capital requirement(a) (b) (c)4,543-3,898In 2022,EDF was overcompensated because of higher market prices received by EDF for the support of the renewables than anticipated.In 2023,EDF was compensated for the amount of the tariff shield less the overcompensation of 2022.Operational dataConsolidated financial statementsCustomers(France)Financing&LiquidityESGMarket dataStrategic projects2,495M4,973M11,925M10,413M6,158M 3,342M-3,097M-2,193M202020212022202332/MWh109/MWh276/MWh97/MWh54CSPE:CHANGE IN SUPPORT FOR RENEWABLES IN MAINLAND FRANCE FOR EDF(1)EDF SA excluding island activities.(2)The compensation mechanism of public energy services charges also covers the charges relating to the gas and electricity tariff cap,the tariff equalisation costs in the ZNI(Zones Non Interconnectes),and the solidarity programmes.2023 ANNUAL RESULTS Principle:In 2022 and 2023,in the context of soaring energy prices,the valuation of energy produced by renewables has exceeded on average the amount of the support by the State,leading to a negative compensation amount.The compensation mechanism of public energy services charges(2)offsets the difference between the cost of support for renewables in mainland France and market prices.In 2023,the tariff shield was financed by the CSPE mechanism Amount of compensation for support for renewables(1)Amount of the support for renewables valued at market prices based on CRE methodologyAmount of the support for renewables Average spot price8,653M8,315M8,828M8,220MOperational dataConsolidated financial statementsCustomers(France)Financing&LiquidityESGMarket dataStrategic projects21,02121,44619,100 425-638-2,110 402Gross operatinginvestmentsGross investmentsNet investments55INVESTMENTS:FROM GROSS TO NET(1)2023 ANNUAL RESULTS Gross financial investmentsOf which EDF Renewables,Edison,Framatome,EDEVDisposals except disposal planOf which EDF RenewablesSubsidies:Of which EDF RenewablesMinority shares:Of which EDF Energy(notably HPC&Sizewell C projects)Subsidies and minority sharesOthers(1)(in millions of euros)(1)Investments in intangible assets and property,plant and equipment in consolidated cash flow statement.(2)Net investments in the Change in NFD statement excluding disposal plan.Of which EDF Renewables,Other InternationalNet investments(2)Operational dataConsolidated financial statementsCustomers(France)Financing&LiquidityESGMarket dataStrategic projects56NET TOTAL INVESTMENTS INCLUDING ACQUISITIONS(1)Regulated activities:Enedis,S and island activities;Enedis,an independent EDF subsidiary as defined in the French energy code.2023 ANNUAL RESULTS 202319.1bn34%FRANCE GENERATION AND SUPPLY ACTIVITIES26%FRANCE REGULATED ACTIVITIES(1)2%FRAMATOME 21%UNITED KINGDOM3%ITALY2%OTHERINTERNATIONAL1%OTHER ACTIVITES2LKIA9F RENEWABLES2LKIA202216.4bn35%FRANCE GENERATION AND SUPPLY ACTIVITIES28%FRANCE REGULATED ACTIVITIES(1)2%FRAMATOME 18%UNITED KINGDOM4%ITALY1%OTHERINTERNATIONAL1%OTHER ACTIVITES10F RENEWABLESOperational dataConsolidated financial statementsCustomers(France)Financing&LiquidityESGMarket dataStrategic projects57NET INVESTMENTS INCLUDING ACQUISITIONSNB:figures rounded up to the nearest decimal number.(1)Mainly property,central functions.2023 ANNUAL RESULTS 2023In billions of eurosNew nuclear(including HPC,Flamanville 3 and EPR2)Nuclear maintenance(France,Belgium and UK)including Grand CarnageServicesRenewablesFramatomeOthers(1)NetworksGas,ThermalMaintenanceDevelopmentTOTAL 2023Nuclear maintenance(France,Belgium and UK)includingGrand Carnage 5.30.05.3Networks2.32.64.9New nuclear(including HPC,Flamanville 3 and EPR2)0.04.54.5Renewables0.42.12.5Framatome0.10.30.4Services0.00.60.6Gas,Thermal0.10.20.3Others(1)0.10.50.6TOTAL8.410.719.10.64.50.44.95.32.50.6202216.4bn3.20.34.44.72.20.60.419.1bn0.30.695%of the Groups investments are made in accordance with its carbon neutrality target56%of investments correspond to development investmentsOperational dataConsolidated financial statementsCustomers(France)Financing&LiquidityESGMarket dataStrategic projects58PROVISIONS RELATED TO NUCLEAR GENERATION IN FRANCE AND PART TO BE COVERED BY DEDICATED ASSETS AT END-20232023 ANNUAL RESULTS 12.11.81.813.213.213.013.05.45.40.60.62.1Total provisions relatedto nuclear generation in FranceLong-term provisions related tonuclear generation in France to becovered by DA48.234.0In billions of euros14.214.08.7Dedicated assetsin realisable valueProvisions for LT management of radioactive wasteProvisions for dismantlingof nuclear plantsProvisions forlast cores(back-end of the nuclear cycle)Yield AssetsGrowth AssetsFixed-income Assets36.9 At 31 December 2023,the regulatory coverage is 108.5%(vs 107.1%at 31 December 2022)No allocation to Dedicated Assets to be made in 2023 and 2024 in respect of 2022 and 2023 owing to a coverage rate of over 100%at end of year,in accordance with the regulation applicable since 1 July 2020(1)Related to the operating cycle.Decommissioning nuclear plants in operationDecommissioning permanently shut-down nuclear plantsLong-term management of radioactive wasteLast core back-end partManagement of nuclear fuel(Non recyclable in existing installations part)Last core front-end partManagement of nuclear fuel(1)(Recyclable in existing installations part)592023 ANNUAL RESULTS FINANCING AND LIQUIDITYOperational dataConsolidated financial statementsCustomers(France)Financing&LiquidityESGMarket dataStrategic projects60DECREASE OF THE NET FINANCIAL DEBT2023 ANNUAL RESULTS In millions of euros31/12/202231/12/2023Financial debt96,05386,647Derivatives used to hedge debts(2,024)(1,379)Cash and cash equivalents(10,948)(10,775)Debt and equity securities(liquid assets)(18,507)(20,077)Asset coverage derivatives(74)(35)Net financial debt(1)64,50054,381(2)(1)After application of IFRS 16.(2)Including 539M($596M)hybrid notes redeemed on 22/01/2024(see press release of 14 December 2023).Operational dataConsolidated financial statementsCustomers(France)Financing&LiquidityESGMarket dataStrategic projects61GROSS DEBT2023 ANNUAL RESULTS 31/12/202231/12/2023Average maturity of gross debt Average coupon9.4 years2.63.0 years4.11%(1)Mainly ILS,INR and BRL.Floating rate41%Fixed rate591/12/2023Breakdown by type of rate after swapsBreakdown by currency after swaps31/12/202242X%USD 5%EUR741/12/202331/12/2022GBP18%Other(1)3y%3%6%Operational dataConsolidated financial statementsCustomers(France)Financing&LiquidityESGMarket dataStrategic projects62HIGH LEVEL OF LIQUIDITY2023 ANNUAL RESULTS In billions of euros31/12/202231/12/2023Cash and cash equivalents10.910.8Liquid assets18.520.1Unused credit lines(off-balance sheet)14.115.8Gross liquidity43.546.7Financial debt current part(maturing within one year)(28.7)(18.9)Net liquidity14.827.8Operational dataConsolidated financial statementsCustomers(France)Financing&LiquidityESGMarket dataStrategic projects0,00,51,01,52,02,53,03,54,04,520242025202620272028202920302031203220332034203520362037203820392040204120422043204420452046204720482049205020512052205320542055205620692114EURGBPUSDCHFJPYAUTRESIn billions of euros,before swaps63FOCUS ON BONDS(1)2023 ANNUAL RESULTS USD 36A%EUR18%GBP1%Others(3)2%CHFStock of bonds as of 31/12/2023:51.4bn(2)JPY 2%Repayments by currencyOthers(3)(1)Nominal amounts only.(2)51.4bn vs 49.1bn in note 18 of the 2023 consolidated financial statement that includes accrued interests and depreciation.(3)Mainly CAD,INR,HKD,BRL and NOK.Operational dataConsolidated financial statementsCustomers(France)Financing&LiquidityESGMarket dataStrategic projects64GREEN FINANCING:PROCEEDS ALLOCATION AND IMPACT REPORTING2023 ANNUAL RESULTS64The detailed list of EDF Renewables projects and hydraulic investment operations by category will be published in EDF 2023 URD.(1)Sum of the impacts of each project weighted by the share of total investment funded by the corresponding Green Bond.Issue dateMaturityNominal amount New renewable capacitiesInvestments in hydro facilitiesBiodiversity projectsTotal net(1)capacity of financed projects(in MW)Expected net(1)avoided CO2emissions(in Mt/yr)Nov.20137.5Y1,400M1,400-9761.55Oct.201510Y1,250M$1,250-8151.83Oct.201610Y1,750M1,248502-1,8651.62Jan.201712Y15Y26,000M14,02111,979-1,2190.13Sept.20204Y2,400M2,246110281,5351.35Nov.202112Y1,850M1,594189231,4871.117,8977.59Issue dateMaturityNominal amount Distribution of electricity projectsRenewable capacity connected(in MW)Number of smart metersNew grid lines built(in km)Oct.202212Y1,250M1,2505,1815,488,0002,950Jul-2023Evergreen REPO565M5652,061614,0001,015Aug-20234Y8Y325MCHF3251,976592,0001,976Issue dateMaturityNominal amount Existing French nuclear reactors in relation to their lifetime extensionExpected net(1)avoided CO2emissions(in Mt/yr)Nov.20233.5Y1,000M1,0001.82Operational dataConsolidated financial statementsCustomers(France)Financing&LiquidityESGMarket dataStrategic projects1,2451,2369891,3382,2351,2381,4518971,3802024202520262027202820292030203365FOCUS ON HYBRIDS SECURITIES2023 ANNUAL RESULTS Hybrid securities stock(1)Hybrid bond issue(1)Exchange rate as of transaction time.(2)Amount redeemed on 22/01/2024 and reclassified on 31/12/2023 as Other financial debt for 539M($596M)(see press release of 14 December 2023).Hybrid bond issues contribute to strengthening the balance sheet through their qualification as equity under IFRS and 50/50 as debt and equity by rating agenciesA new$1.5bn emission paying 9.125%,with a 10-year first call date at EDFs discretion,was issued in June 2023.A tender offer on the$1.5bn hybrid bonds,callable in January 2024 was launched at the same time,resulting to a purchased amount of around$0.9bn(redemption of the remaining outstanding bonds on 22 January 2024)Total amount:12.0bn(1)Average tenor:4.02 yearsAverage cost:5.16%Hybrid debt maturity schedule based on first call datesHybrids stock breakdown by currency as of 31/12/2023USD 11%EUR 69%GBP 20%(in millions of euros)539(2)Operational dataConsolidated financial statementsCustomers(France)Financing&LiquidityESGMarket dataStrategic projects66COMPARATIVE CREDIT RATINGS(1)Sources:rating agencies as of 06/02/2024.(1)See EDFs ratings2023 ANNUAL RESULTS Rating AgencyLatest ChangesBBBStable14 December 2022Outlook revised to Stable from NegativeCreditWatch Negative RemovedBaa1Stable1 June 2023Outlook revised to Stable from NegativeBBB Stable6 September 2022Outlook revised to Stable from Negative(affirmed on 3 April 2023)A EngieIberdrolaE.ONEnelBaa3BBB A-ABaa1A3A2A1EDFSSEMoodys ratingsBaa2BBBBBB-S&P ratingsEDPTotalEnergies672023 ANNUAL RESULTS ESGOperational dataConsolidated financial statementsCustomers(France)Financing&LiquidityESGMarket dataStrategic projectsWorldwide average rating A-CCA*Range between 45-65787242*AA-2532*Water SecurityClimate ChangeESG Risk RatingN3/65Top 1%MAIN INTERNATIONAL COALITIONS OF EDF*Sector average rating(ex-VE)(1)68NON-FINANCIAL RATINGS(1)The Moodys ESG score obtained in 2022 is valid for 2 years.2023 ANNUAL RESULTS EDFs ratingTop 18%Operational dataConsolidated financial statementsCustomers(France)Financing&LiquidityESGMarket dataStrategic projects69ENVIRONMENTAL PERFORMANCE AND SOCIAL ACTIONS2023 ANNUAL RESULTS EDFS TRAJECTORY 1.5C VALIDATED BY MOODYS Moodys Net Zero Assessment evaluates EDFs emission reduction targets to be consistent with the most ambitious Paris Agreement goals andscores its ambition to 1.5 degreeEDF,SUSTAINABLE COMPANY RECOGNISED WORLDWIDEEDF ranked:4thby WBA Electric Utilities Benchmarkassessing climate and social performances(over 68 electric utilities)8th at Worlds Best Companies of 2023 by Timenewspaper.This benchmark identifies the best companies changing the world(over 750 compagnies)4thoverall and 1stenergy company in the Universum survey monitoring companies perceived as the most committed to sustainability by French studentsEDF COMMITTED TO VULNERABLE CUSTOMERSEDF does not cut off electricity of residential customers in France in case of unpaid bill but applies a power limit since April 2022Positive impacts for customers of this voluntary commitment recognised by Fondation Abb Pierre702023 ANNUAL RESULTS MARKET DATAOperational dataConsolidated financial statementsCustomers(France)Financing&LiquidityESGMarket dataStrategic projects71FRANCE EXPORT BALANCE AND AVERAGE SPOT PRICES(1)IN 2023(1)Average observed spot market price for 2023:EPEXSPOT(France&Germany),N2EX(United-Kingdom),OMIE(Spain),GME(Italy-Prezzo Unico Nazionale),APX(Netherlands),BELPEX(Belgium).(2)Change in average prices vs 2022.(3)Total consumption and generation non corrected by temperature effects(Source:RTE).(4)Introduction of flow-based coupling mechanism from 21 May 2015 for the entire CWE(France,Benelux,Germany).(5)Variation export balance vs 2022(Source:ENTSO-E Transparency Website).(6)Export and Import flows(Source:ENTSO-E Transparency Website).2023 ANNUAL RESULTS 127.8/MWh96.9/MWh95.2/MWh95.8/MWh108.0/MWh87.1/MWh97.3/MWh-146.1/MWh(2)-132.1/MWh(2)-140.2/MWh(2)-179.0/MWh(2)-180.0/MWh(2)-147.2/MWh(2)-80.4/MWh(2)CWE(4)7.4TWh20,6TWh11.7TWh9.8TWh1.1TWh21.1TWh18.8TWh21.3TWh4.6TWh20.9TWhExport balance France: 50.3TWh(6)(balance in 2022:-16.4TWh)Exports:93.9TWh(6)(56.5TWh in 2022)Imports:43.6TWh(6)(72.9TWh in 2022)The rise in electricity generation to 494.3TWh(3)and the decrease in demand to 438.3TWh(3)lead to higher export( 66%vs 2022)(6)and lower imports(-40%vs 2022)(6)16.4TWh 4.2TWh(5)2.5TWh 29.9TWh(5)13.2TWh 23.1(5)-1.9TWh 7.4(5)20.0TWh 2.0TMWh(5)Operational dataConsolidated financial statementsCustomers(France)Financing&LiquidityESGMarket dataStrategic projects(In TWh)72ELECTRICITY CONSUMPTION CONTINUES TO DECREASE IN FRANCE(1)2023 ANNUAL RESULTS 20222023Drop by c.16.4TWh(-3.2%)due to:energy sufficiency since Q4 2022 low-economic growth high level of retail prices weather effect for c.-1.3TWh(1)Data unadjusted from weather effect,including Corsica.Source:RTE138.4101.897.0115.5129.897.494.0117.1Q1Q2Q3Q4Electricity consumption in France in 2023:438,3TWh(vs 452.7 in 2022)Operational dataConsolidated financial statementsCustomers(France)Financing&LiquidityESGMarket dataStrategic projects73FORWARD ELECTRICITY PRICES(Y 1)IN FRANCE,UK AND ITALY(2022-2023)2023 ANNUAL RESULTS 01002003004005006007008009001 0001 1001 200Jan-22Feb-22 Mar-22Apr-22 May-22Jun-22Jul-22Aug-22Sep-22Oct-22Nov-22 Dec-22Jan-23Feb-23 Mar-23Apr-23 May-23Jun-23Jul-23Aug-23Sep-23Oct-23Nov-23 Dec-23Electricity-Annual Baseload contract France(EEX)Electricity-Annual Baseload contract UK(EDFT)Electricity-Annual Baseload contract Italy(EEX)(in/MWh)Operational dataConsolidated financial statementsCustomers(France)Financing&LiquidityESGMarket dataStrategic projects74FORWARD ELECTRICITY PRICES(Y 2)IN FRANCE,UK AND ITALY(2022-2023)2023 ANNUAL RESULTS 01002003004005006007008009001 0001 1001 200Jan-22Feb-22 Mar-22Apr-22 May-22Jun-22Jul-22Aug-22Sep-22Oct-22Nov-22 Dec-22Jan-23Feb-23 Mar-23Apr-23 May-23Jun-23Jul-23Aug-23Sep-23Oct-23Nov-23 Dec-23Electricity-Annual Baseload contract France(EEX)Electricity-Annual Baseload contract UK(EDFT)Electricity-Annual Baseload contract Italy(EEX)(in/MWh)Operational dataConsolidated financial statementsCustomers(France)Financing&LiquidityESGMarket dataStrategic projects-5050150250350450550650750JanFebMarAprMayJunJulAugSepOctNovDec2023202275FRANCE:BASELOAD ELECTRICITY DAILY SPOT PRICES2023 ANNUAL RESULTS Source:EPEXSpot electricity prices in France averaged 96.9/MWh base load,down by 64.9%vs 2022 explained by:-increase of generation by 15%for nuclear power,by 30%for wind and 20%for solar vs 2022-lower consumption compared to 2022(3.5%)These factors mitigated the use of gas assets with a decrease in generation by 34%.These gas assets benefited from lower commodity prices:-60%for the PEG spot index in 2023 vs 2022Min 2022:4.4/MWhMax 2022:743.8/MWhMax 2023:204.9/MWh(daily average in/MWh)Min 2023:-1.2/MWh2023 RESULTS
2024-08-09
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2023 中信証券年度報告CITIC SECURITIES 2023Annual ReportIntegrityInnovationExcellenceSharingTo become a leading domestic and internationally renowned Chinese investment bank,trusted by clients around the worldWebsite:http:/Email:Telephone:0086-10-60838888,0086-755-23835888,00852-26008888Address:CITIC Securities Tower,No.48 Liangmaqiao Road,Chaoyang District,Beijing CITIC Securities Tower,No.8 Zhong Xin San Road,Futian District,Shenzhen,Guangdong Province 26/F,CITIC Tower,1 Tim Mei Avenue,Central,Hong KongA joint stock limited company incorporated in the Peoples Republic of China with limited liabilityStock Code:6030中信証券年度報告CITIC SECURITIES 2023Annual Report2023IMPORTANT NOTICEThe Board and the Supervisory Committee and the Directors,Supervisors and Senior Management of the Company warrant the truthfulness,accuracy and completeness of the contents of this report and that there is no false representation,misleading statement contained herein or material omission from this report,for which they will assume joint and several liabilities.This report was considered and approved at the Eighteenth Meeting of the Eighth Session of the Board of the Company.All Directors attended this meeting of the Board.No Director raised any objection to this report.KPMG Huazhen LLP and KPMG issued the standard and unqualified auditors reports for the Companys domestic and international financial statements for the year,respectively.Mr.ZHANG Youjun,head of the Company,Mr.ZHANG Hao,the Chief Financial Officer and Ms.XI Zhiying,the head of the Companys accounting department,warrant that the financial statements set out in this report are true,accurate and complete.The Companys profit distribution plan during the Reporting Period as resolved and approved by the Board is to distribute a cash dividend of RMB4.75(tax inclusive)for every 10 Shares.This proposal is subject to the approval by the general meeting of the Company.Forward looking statements,including future plans and development strategies,contained in this report do not constitute a substantive commitment to the investors by the Company.Investors should be aware of investment risks.There was no appropriation of funds of the Company by the controlling shareholder and its related/connected parties for non-operating purposes.The Company had made no guarantee to external parties in violation of the stipulated decision-making procedures.There is no such a situation where the majority of the Directors cannot warrant the truthfulness,accuracy and completeness of the annual report disclosed by the Company.The Company prepared this report in both English and Chinese versions.In the event of any discrepancies between the English version and the Chinese version of this report,the Chinese version shall prevail.Contents2520256683126141161199343344349350351Chairmans StatementCompany InformationFinancial SummaryManagement Discussion and AnalysisReport of the BoardSignificant EventsChanges in Shares and Information on Substantial ShareholdersDirectors,Supervisors,Senior Management and EmployeesCorporate Governance ReportIndependent Auditors Report and Notes to Financial StatementsDocuments Available for InspectionDefinitionsMaterial Risk FactorsAppendix 1:Organization ChartAppendix 2:Index of Information DisclosureContentsChairmans Statement02Dear Shareholders,2023 was the first year to fully implement the spirit of the 20th National Congress of the Communist Party of China(CPC).Over the year,China has made solid strides in building itself into a modern socialist country in all respects.In 2023,steadily promoting its operation and management,CITIC Securities maintained stable operating results and an industry-leading position in various lines of business.During this year,the Company recorded an operating revenue of RMB60.068 billion and a net profit attributable to Shareholders of the Company of RMB19.721 billion,with total assets reaching RMB1.45 trillion.It is with the care and support of the Shareholders and the investors that we have accomplished these results.On behalf of CITIC Securities,I hereby extend our deep appreciation to all Shareholders.2023 also marked the 20th anniversary of the A-share listing of CITIC Securities.On our first successful Investor Engagement Campaign,we shared the experience drawn from our development since the Company went public 20 years ago and talked to the Shareholders,investors,and customers vis-vis to better take advice from the investors and demonstrate our investment value.Over the past 20 years from the day it was floated,the Company has remained dedicated to following national strategies and serving the real economy.To give back to investors and deliver customer-oriented services,we have established a comprehensive licensed financial service system,consistently expanded our balance sheet,practically managed risk and compliance in all respects,built market-oriented management mechanisms,propelled tech-enabled digital transformation on all fronts,and actively fulfilled our social responsibility.Moreover,we have been providing stable returns to Shareholders and investors by paying dividends of RMB73.9 billion to Shareholders over the two decades.Over the past year,by developing new quality productive forces we achieved more remarkable results in serving the real economy.As a champion of the innovation-driven development strategy,we have been helping build a modern industrial system.Our aggregate underwriting size of equities listed on the STAR Market,ChiNext and BSE and our underwriting size of innovation-driven technology company bonds both ranked first in the market with an underwriting size of equity and debt of RMB2.2 trillion in aggregate.We channeled more social capital into fields critical to Chinas scientific and technological self-reliance,such as new materials,new energy,and information technology by making investments of nearly RMB10 billion through our proprietary funds and private equity funds.A number of enterprises we invest in have overcome the bottlenecks in the key links of industrial chains.Over the past year,we have been committed to delivering inclusive finance services to better meet the wealth management needs of investors.We have been providing all-round,high-quality and multi-level wealth management and asset management services,and building a multi-level buyer investment advisor configuration service system.We have achieved 2023 Annual Report03CITIC Securities Company LimitedChairmans Statementthe coverage of all asset segments and all types of customers from RMB10 thousand to more than RMB10 million,better satisfying the personalized and differentiated allocation needs of customers and improving investors sense of contentment.We exerted continuous efforts to build the brand influence of our pension business,support the development of the three pillars of pension,and conduct financial investment management services oriented to elderly care undertakings.The total size of social insurance,basic pension,enterprise annuity,and occupational annuity under management amounted to more than RMB730 billion.We were rated A for fundamentals in the evaluation by the National Council for Social Security Fund of the Peoples Republic of China.Over the past year,we offered green finance services and actively fulfilled our social responsibilities.We actively propelled and participated in the innovation of green financial products and services to provide abundant green financial solutions for enterprises,and guided the green and low-carbon transformation of industrial and energy structures through capital allocation.We underwrote a total of RMB71.6 billion for 150 green bonds(including carbon-neutral bonds)and served Yangtze Power in the completion of the material assets restructuring of RMB80.5 billion.We creatively carried out the carbon finance business,completed the first repurchase transaction for combined carbon assets,and created the first risk mitigation tool for carbon asset pledge loan in China.To promote public welfare and support rural revitalization,we donated and invested a total of RMB55.17 million throughout the year,and provided immediate assistance to the earthquake-stricken area in Jishishan,Gansu Province,fully leveraging the role of CITIC Securities as a public welfare fund platform.The Companys MSCI ESG rating has been upgraded for two consecutive years and has reached Grade A.04Chairmans StatementOver the past year,we focused on risk prevention to build a more robust global risk and compliance control system.Paying close attention to the correlation and systematicness among various financial risks,as well as the prevention and mitigation of cross-market,cross-industry,and cross-border risks,we proceeded with proper counter-cyclical management of financial risks in the new situation and effected whole-process management covering various risks in multiple dimensions.We optimized the internal management by means of information technology and digitalization,enhanced the capabilities of new risk prevention and compliance management,and continued to improve due diligence criteria and requirements for the audit process.We required the front office and middle office to take risk management seriously and strengthened the personnel management and internal training,so as to properly conduct daily risk monitoring,early warning,prevention and resolution.We spent more efforts on systematic capability building,and improved the risk disposal responsibility mechanism with consistent rights and responsibilities,compatible incentives and constraints.The year 2024 marks the 75th anniversary of the founding of the Peoples Republic of China and also a critical period for fulfilling the goals and tasks set in the national 14th Five-year Plan.Following the guidance of Xi Jinping Thought on Socialism with Chinese Characteristics for a New Era throughout,CITIC Securities will bear in mind the countrys most fundamental interests and strengthen the sense of serving the people.To speed up building the Company into a first-class investment bank and investment institution,we will continue to optimize our overall plan for global business,reinforce the construction of our global business system,enhance our capabilities of delivering cross-border,cross-business,and cross-market services,and boost the quality and efficiency of serving the real economy.Furthermore,while assisting in customers long-term development,we will remain committed to serving investors interests in a bid to continually create long-term stable value in return for the investment of Shareholders and investors and contribute as much as we can to the construction of a financial powerhouse.ZHANG YoujunChairmanCITIC Securities Company Limited26 March 2024Company Information2023 Annual Report05CITIC Securities Company LimitedCompany InformationProfileName in Chinese中信証券股份有限公司Abbreviation in Chinese中信証券Name in EnglishCITIC Securities Company LimitedAbbreviation in EnglishCITIC Securities Co.,Ltd.Legal RepresentativeZHANG YoujunPresidentYANG MinghuiAuthorized RepresentativesYANG Minghui,YANG YouyanRegistered Capital and Net Capital of the CompanyIn RMB YuanAs at the end of the Reporting PeriodAs at the end of last yearRegistered Capital14,820,546,829.0014,820,546,829.00Net Capital139,615,490,534.95135,851,886,858.17Note:As of the date of publication of the report,the total number of Shares of the Company was 14,820,546,829,of which 12,200,469,974 were A Shares and 2,620,076,855 were H SharesThe Business Scope of the Company includes:securities brokerage(for areas other than Shandong Province,Henan Province,Tiantai and Cangnan Counties of Zhejiang Province),securities investment consulting,financial advice in relation to securities trading and investment activities,securities underwriting and sponsoring,self-operated securities business,securities assets management(NSSF domestic entrusted investment management,securities investment management for basic pension insurance fund,investment management for enterprise annuity fund and investment management for occupational pension fund),securities margin trading,selling of securities investment funds,provision of intermediary introduction services to futures companies,distribution of financial products,stock options market making,market making for listed securities.(For projects subject to approval in accordance with laws,business activities may be carried out only after approval by relevant authorities,and specific business projects are subject to the approval documents and licenses from the relevant authorities)In addition,the Company also has the following business qualifications:1.Business qualifications approved or certified by the CSRC:entrusted investment management business,online securities entrustment business;entrusted wealth management;operation of overseas securities investment management business by qualified domestic institutional investors(QDII);direct investment;interbank market interest rate swap business;stock index futures trading in proprietary business and asset management business;pilot business of stock return swap;first class OTC option dealer;treasury bond futures trading in proprietary business and securities asset management business;pilot business of agency services for gold and other precious metal spot contracts and proprietary trading for spot gold contracts;custodian business for securities investment funds;credit risk mitigation instruments selling business;market making business of treasury bond futures;commodities derivatives transaction and the trading of financial products on overseas exchanges;carrying out pilot cross-border business;market making business for listed securities.06Company Information2.Business qualifications approved by the stock exchange:market maker of stock exchange fixed income platform;warrants trading;agreed repurchase-type securities trading business;stock pledge-style repo business;margin refinancing and securities relending;Southbound Trading Connect business;bond pledge-style quoted repo business;financing business with respect to exercising rights under share incentive schemes of listed companies;stock options brokerage;proprietary trading for stock options;SSE and SZSE ETF options market makers;China Financial Futures Exchange stock index options market maker;commodity options market maker of Dalian Commodity Exchange,Zhengzhou Commodity Exchange,Shanghai Futures Exchange,Shanghai International Energy Exchange;and member of BSE.3.Business qualifications approved by SAC:quoted transfer business;OTC market business;OTC trading business;internet-based securities business pilot;cross-border income swap transaction business.4.Business qualifications approved by the Peoples Bank of China:lending transactions and bond transactions in the National Interbank Funding Centre;short-term commercial paper underwriting;market maker in interbank bond market;and primary dealer of open market.5.Other business qualifications:member of book-entry government bond underwriting syndicate;Class A clearing participant of CSDC;license for operating foreign exchange in securities business(foreign-currency negotiable securities brokerage,foreign-currency negotiable securities underwriting and entrusted foreign-exchange asset management);investment manager for enterprise annuity fund and occupational pension fund;member of underwriting syndicate of policy bank;manager of converted shares of the NSSF;NSSF domestic investment manager;entrusted management of insurance funds;securities investment management for national basic pension insurance fund;pilot refinancing business;sideline insurance agency business;business with special institutional clients of insurance institutions;recommending business and brokerage business through National Equities Exchange and Quotations;market-making business through National Equities Exchange and Quotations;consultancy services relating to the secrecy-involved business of the military industry;member of Shanghai Gold Exchange;product general clearing member of Shanghai Clearing House;foreign exchange settlement and sale business;member of Asset Management Association of China;member of interbank foreign exchange market;member of interbank foreign currency market;member of the Shanghai Commercial Paper Exchange Corporation Ltd.;and trustee of debt financing instruments for non-financial enterprises.Contact Person and MethodsBoard Secretary,Securities Affairs Representative,Company SecretaryNameBoard Secretary:WANG JunfengSecurities Affairs Representative:WANG LeiJoint Company Secretaries:YANG Youyan,YU Hiu Kwan,HildaContact AddressCITIC Securities Tower,No.48 Liangmaqiao Road,Chaoyang District,BeijingCITIC Securities Tower,No.8 Zhong Xin San Road,Futian District,Shenzhen,Guangdong Province(Note:This is a postal address and is in the same building as that of the registered address of the Company.The registered address of the Company corresponds to the name of the building registered with the Shenzhen Real Estate Ownership Registration Centre)Telephone0086-10-60836030,0086-755-23835383Facsimile0086-10-60836031,0086-755-23835525E2023 Annual Report07CITIC Securities Company LimitedCompany InformationBasic InformationRegistered Address of the CompanyNorth Tower,Excellence Times Plaza(II),No.8 Zhong Xin San Road,Futian District,Shenzhen,Guangdong ProvinceHistorical Change of Registered Address of the CompanyOn 6 April 2000,with the approval of CSRC and the former State Administration for Industry&Commerce of the Peoples Republic of China,the registered office of the Company was changed from Beijing to ShenzhenOffice Address of the CompanyCITIC Securities Tower,No.48 Liangmaqiao Road,Chaoyang District,Beijing CITIC Securities Tower,No.8 Zhong Xin San Road,Futian District,Shenzhen,Guangdong ProvincePostal Code of Office Address of the Company100026,518048Business Address in Hong Kong26/F,CITIC Tower,1 Tim Mei Avenue,Central,Hong KongWebsite of the Companyhttp:/ETelephone0086-10-60838888,0086-755-23835888Facsimile0086-10-60836029,0086-755-23835861Customer Service Hotline for Brokerage and Asset Management Business95548,4008895548Investor Relations Hotline0086-10-60836030,0086-755-23835383Unified Social Credibility Code91440300101781440208Company InformationInformation Disclosure and Availability PlacesMedia designated for information disclosure by the CompanyChina Securities Journal,Shanghai Securities News,Securities TimesThe websites designated for publication of the Annual Reports of the CompanyWebsite designated by the CSRC:http:/(website of the SSE)Website designated by the Hong Kong Stock Exchange:http:/www.hkexnews.hk(HKEXnews website of HKEX)Website of the Company:http:/Places where Annual Reports of the Company are available10/F,CITIC Securities Tower,No.48 Liangmaqiao Road,Chaoyang District,Beijing16/F,CITIC Securities Tower,No.8 Zhong Xin San Road,Futian District,Shenzhen,Guangdong Province26/F,CITIC Tower,1 Tim Mei Avenue,Central,Hong KongBrief Information of the Shares of the CompanyClass of SharesStock Exchange of ListingStock Short NameStock CodeA ShareSSECITIC Securities600030H ShareHong Kong Stock ExchangeCITIC SEC6030Other Information of the CompanyHistory of the Company The Company was incorporated in Beijing in October 1995,under the name of CITIC Securities Limited,with registered capital of RMB300,000,000.The principal Shareholder of the Company was CITIC Group which directly held 95%of share capital of the Company.In December 1999,CITIC Securities Limited was converted into a joint stock limited company known as CITIC Securities Company Limited.The registered capital was increased to RMB2,081,500,000 and the direct shareholding of CITIC Group was 37.85%.In April 2000,with the approval of CSRC and the former State Administration for Industry&Commerce of the Peoples Republic of China,the Company was relocated to Shenzhen.In December 2002,the Company conducted the initial public offering of 400,000,000 A Shares,and such Shares were listed on the SSE in January 2003 with proceeds of RMB1.8 billion.The total number of Shares of the Company was increased to 2,481,500,000 and the direct shareholding of CITIC Group was 31.75%.In August 2005,the Company carried out and completed the non-tradable shares reform,and all such Shares were tradable shares,and the direct shareholding of CITIC Group was 29.89%.In June 2006,the Company completed the A Shares private issuance and the proceeds amounted to RMB4.645 billion.The total number of Shares of the Company increased to 2,981,500,000 and the direct shareholding of CITIC Group was 24.88%.2023 Annual Report09CITIC Securities Company LimitedCompany InformationIn September 2007,the Company completed the A Shares public equity issuance and the proceeds amounted to RMB25 billion.The total number of Shares of the Company increased to 3,315,233,800 and the direct shareholding of CITIC Group was 23.43%.In April 2008,the Company completed a capitalization issue of 10 bonus Shares for every 10 Shares.The total number of Shares of the Company increased to 6,630,467,600.In June 2010,the Company completed a capitalization issue of 5 bonus Shares for every 10 Shares.The total number of issued Shares of the Company increased to 9,945,701,400.In October 2011,the Company conducted the initial public offering of 1,071,207,000 H Shares,which were listed and traded on the Hong Kong Stock Exchange in October and November.The net proceeds amounted to approximately HK$13.82 billion,making the Company the first Chinese securities company listed overseas.The total number of Shares of the Company increased to 11,016,908,400,of which 9,838,580,700 Shares were A Shares and 1,178,327,700 Shares were H Shares,and the direct shareholding of CITIC Group was 20.30%.In February 2013,the largest Shareholder of the Company was changed to CITIC Corporation Limited and its direct shareholding in the Company was 20.30%.In June 2015,the Company completed the H Share private placement and the proceed amounted to approximately HK$27.06 billion.The total number of Shares of the Company increased to 12,116,908,400,of which 9,838,580,700 Shares were A Shares and 2,278,327,700 Shares were H Shares.The direct shareholding of CITIC Corporation Limited was 15.59%.In February 2016,CITIC Corporation Limited increased its shareholding in the Company and the direct shareholding of CITIC Corporation Limited increased to 16.50%.In March 2020,the Company completed the acquisition of Guangzhou Securities by A Shares private placement.The total number of Shares of the Company increased to 12,926,776,029,of which the number of A Shares increased to 10,648,448,329.The direct shareholding of CITIC Corporation Limited was 15.47%.New substantial shareholders,namely Yuexiu Financial Holdings(now renamed as“Guangzhou Yuexiu Capital Holdings Group Co.,Ltd.(廣州越秀資本控股集團股份有限公司)”)and Financial Holdings Limited(now renamed as“Guangzhou Yuexiu Capital Holdings Co.,Ltd.(廣州越秀資本控股集團有限公司)”),with an aggregate shareholding ratio of 6.26%,were added.In March 2022,the Company completed A H Share rights issuance and the proceed amounted to approximately RMB27.33 billion.The total number of Shares of the Company increased to 14,820,546,829 Shares,of which A Shares increased to 12,200,469,974 Shares and H Shares increased to 2,620,076,855 Shares.CITIC Limited and CITIC Corporation Limited held a total of 18.45%of the Companys Shares,and Yuexiu Financial Holdings,Financial Holdings Limited and Yuexiu Financial International held a total of 7.47%of the Companys Shares.In August 2023,the largest shareholder of the Company had been changed to CITIC Financial Holdings.After CITIC Corporation Limited,the former largest shareholder,together with CITIC Limited,its party acting in concert,gratuitously transferred all shares held in the Company to CITIC Financial Holdings,CITIC Financial Holdings held 2,299,650,108 A Shares and 434,311,604 H Shares of the Company,amounting to a total of 2,733,961,712 Shares,representing 18.45%of the total issued shares of the Company.10Company InformationAfter its listing on SSE,the Company has since been included in the SSE 180 Index,SSE 50 Index,CSI 300 Index,FTSE China A50 Index,Dow Jones China 88 Index,MSCI China A50 Index,Hang Seng(China A)Corporate Sustainability Benchmark Index,CSI 300 ESG Benchmark Index,SSE SH Equities Index,SSE Central State-owned Enterprises 50 Index,CSI State-owned Enterprises 200 Index,CSI Connect A Share Investment 50 Thematic Index(中證互聯互通A股投資50主題指數),CSI Green Value ESG 100 Index(中證綠色價值ESG100指數),CSI High Dividend Top Index,SSEF 200 Index and SSE Dividend Allocation Index,etc.After its listing on the Hong Kong Stock Exchange,the Company has since been included in constituent stocks of indices such as the Hang Seng China H-Financials Index,Hang Seng China AH Index Series,Hang Seng Composite Index,Hang Seng Composite Industry Index Financials,Hang Seng Composite MidCap Index,Hang Seng China(Hong Kong-listed)100 Index,Hang Seng CSI Shanghai-Hong Kong AH Smart Index,MSCI China Index,Hang Seng(China A)Corporate Sustainability Benchmark Index,FTSE China 50 Index,Hang Seng Climate Change 1.5C Target Index,Hang Seng China 50 Index,Hang Seng Stock Connect China 80 Index and Hang Seng Stock Connect Greater Bay Area High Dividend Yield Index,which greatly enhanced the prestige of the Company.Since the launch of Shanghai-Hong Kong Stock Connect on 17 November 2014,the Shares of the Company have been included in its northbound trading list and southbound trading list respectively.Upon the launch of Shenzhen-Hong Kong Stock Connect on 5 December 2016,H Share of the Company has become an eligible stock of Shenzhen-Hong Kong Stock Connect.Changes in registration status during the Reporting Period:On 6 April 2023,the Company completed the filing of amendments to directors and supervisors of the Company and licensed operation projects and the Articles of Association with the Shenzhen Administration for Market Regulation.Information of first registration:Date of First Registration:25 October 1995First Registered Address:Capital Mansion,No.6 Xinyuan South Road,Chaoyang District,BeijingRegistration Number of Corporate Legal Person Business License:10001830Certificate of Organization Code:10178144-0Please refer to“Company Information”of the 2002 Annual Report of the Company for the information on the first registration of the Company.Changes in the businessesThe Company was established by CITIC Group through integrating the original scattered securities operating institutions immediately after the initial start of the securities market in China.At the end of 1996,the Company became one of the first ten securities houses whose stock underwriting qualification was re-approved by CSRC.In October 1999,the Company became one of the first batch of comprehensive securities companies approved by CSRC and one of the first batch of securities houses whose qualification as a lead underwriter for equity product was re-approved by CSRC.The Company is one of the supervisor members of the Securities Association of China,one of the first batch of securities companies to enter into the national interbank lending market,and one of the first batch of securities companies authorized to engage in stock-secured loans.In 2002,the Company obtained the qualifications to engage in entrusted investment management business and fund sales agency services.2023 Annual Report11CITIC Securities Company LimitedCompany InformationIn 2005,the Company obtained the qualification as enterprise annuity investment manager.In 2006,the Company became one of the first batch of securities companies to obtain the qualification as a lead underwriter of short-term commercial papers.In 2007,the Company obtained the qualifications for the trial business of direct investment and overseas securities investment management business as a qualified domestic institutional investor(QDII).In 2008,the Company became a Class-A clearing participant of CSDC and obtained the qualification for the provision of intermediary introduction services to futures companies.In 2009,the Company obtained the qualification to manage the transfer of converted shares of the NSSF.In 2010,the Company obtained the qualifications for margin financing and securities lending business,stock index futures trading in proprietary business and assets management business and was approved to be a domestic investment manager for the NSSF.In 2011,the Company became one of the first batch of companies to obtain the agreed repurchase-type securities trading qualification.In 2012,the Company obtained the qualifications for underwriting of private placement of SME bonds,entrusted management of insurance funds,distribution of financial products,pilot businesses of stock return swap,pilot refinancing business and consultancy services relating to secrecy-involved business of the military industry.In 2013,the Company obtained the qualifications for sideline insurance agency business,and treasury bond futures trading in proprietary business and the securities assets management business.It was among the first batch of companies to obtain the qualifications for membership of Shanghai Clearing House on RMB interest rate swaps.In 2014,the Company was among the first batch of companies to obtain the qualification as a general clearing member of Shanghai Clearing House to conduct the clearing agency business.It obtained the qualifications for agency services business for gold and other precious metal spot contracts and proprietary business for spot gold contracts,OTC option business,Internet-based securities business,New OTC market-making business,securities investment fund custody business,Southbound Trading Connect business,credit risk mitigation instruments selling business and financing business with respect to exercising rights under share incentive schemes of listed companies,and was qualified as a primary dealer of the open market.In 2015,the Company obtained the qualification of the stock options market making business,and was approved to commence SSE 50 ETF options market making business;the Company became a stock options trading participant on the SSE and obtained the trading permission to commence the stock options brokerage and proprietary trading business.In 2016,the Company obtained the qualification to manage investment with occupational annuity and was accepted as a non-bank member on the Shanghai Commercial Paper Exchange Corporation Ltd.,and obtained the trading permission to commence the rediscount,pledged repurchase,outright repurchase and other transactions of bills.In 2017,the Company obtained the qualification of market-making of commodity options on the Zhengzhou Commodity Exchange.12Company InformationIn 2018,the Company obtained the qualifications for investment in overseas financial products or instruments that other QDIIs are allowed to invest in using its proprietary capital;obtained the qualifications of market-making on the Shanghai Futures Exchange.In 2019,the Company obtained the business qualification as principal market maker of listed funds;was approved to conduct the market making business of treasure bond futures and the stock index option market making business;obtained the operation qualification of settlement and sale of foreign exchange business,and can conduct pilot settlement and sale of foreign exchange business;became a member of the interbank foreign exchange market and the interbank foreign currency market,and can engage in spot,forward,swap,currency swap,foreign currency interest rate swap and options trading;obtained the qualification of market-making of commodity options on the Zhengzhou Commodity Exchange and the Dalian Commodity Exchange.In 2020,the Company can carry out related foreign exchange business on behalf of customers,and became the trustee of debt-financing instruments for non-financial enterprises and can carry out entrusted management business.In 2021,the Company obtained the qualification of membership on the BSE,carried out the pilot fund investment advisory business,the pilot business of account management function optimization,and centralized clearing agency business for credit default swaps.In 2022,the Company obtained the qualification of market-making trading of listed securities,and can engage in the pilot market-making business of stocks on the STAR Market,can participate in the market-making and securities lending business on the STAR Market,can independently carry out the lead underwriting business of debt financing instruments of non-financial enterprises,carry out sideline insurance agency business and agency sale business of personal pension investment fund.In 2023,CITIC Securities AM obtained the license for operating securities and futures business and commenced business,and the Companys securities asset management business(excluding the domestic entrusted investment management of the National Social Security Fund,the securities investment management of the basic pension insurance fund,the investment management of the enterprise annuity fund and the investment management of the occupational annuity fund)and the overseas securities investment management business conducted by qualified domestic institutional investors(QDII),and the qualification for entrusted management of insurance funds will be inherited by CITIC Securities AM.The organization status of the CompanyAs at the end of the Reporting Period,the Company has seven principal wholly-owned subsidiaries,namely CITIC Securities(Shandong),CSI,GoldStone Investment,CITIC Securities Investment,CITIC Futures and CITIC Securities South China,CITIC Securities AM,and one principal controlling subsidiary,namely China AMC.Please refer to“Analysis of principal controlling subsidiaries”of this report for details.Number and distribution of securities branches of the CompanyAs at the end of the Reporting Period,the Company,CITIC Securities(Shandong),CITIC Securities South China,Kington Securities had 53 branch offices and 313 securities outlets in China.In addition,as at the end of the Reporting Period,CSI had six branches in Hong Kong through its subsidiary.2023 Annual Report13CITIC Securities Company LimitedCompany InformationThe number and distribution of domestic securities outlets of the Group are as follows:Province,city or areaNumber of outletsProvince,city or areaNumber of outletsProvince,city or areaNumber of outletsZhejiang60Shandong52Guangdong50Jiangsu26Beijing22Shanghai20Hubei10Liaoning10Fujian7Jiangxi7Henan7Sichuan7Hebei7Shaanxi6Hunan6Tianjin4Anhui3Shanxi2Guangxi2Heilongjiang1Yunnan1Chongqing1Jilin1Inner Mongolia1The number and distribution of domestic securities branch offices of the Group are as follows:Province,city or areaNumber of branch officesProvince,city or areaNumber of branch officesProvince,city or areaNumber of branch officesZhejiang7Shandong5Guangdong7Jiangsu5Beijing1Shanghai2Hubei1Liaoning2Fujian2Jiangxi1Henan1Sichuan1Hebei1Shaanxi1Hunan1Tianjin1Anhui1Shanxi1Guangxi1Heilongjiang1Yunnan1Chongqing1Jilin1Inner Mongolia1Hainan1Guizhou1Gansu1Xinjiang1Ningxia1Qinghai114Company InformationNumber and distribution of other branchesAs at the end of the Reporting Period,CITIC Futures held 47 branch offices and 4 futures outlets in China,the number and distribution of which are as follows:Province,city or areaNumber of branchesProvince,city or areaNumber of branchesProvince,city or areaNumber of branchesBeijing3Guizhou1Inner Mongolia1Shanghai4Hainan1Ningxia1Guangdong6Hebei1Shandong4Zhejiang7Henan1Shanxi1Yunnan1Hubei1Shaanxi1Heilongjiang1Hunan1Sichuan1Anhui1Jiangsu3Tianjin1Fujian2Jiangxi1Xinjiang1Gansu1Liaoning2Chongqing1Guangxi1Other Relevant InformationAuditors engaged by the Company(Domestic)NameKPMG HuazhenOffice Address8th Floor,KPMG Tower,OrientalPlaza,1 East Chang An Avenue,Dongcheng District,Beijing,the PRCName of the signing accountantAbby Wang,CHENG HailiangAuditors engaged by the Company(Overseas)NameKPMG Hong Kong Office Address8th Floor,Princes Building,10 Chater Road,Central,Hong Kong,the PRCName of the signing accountantThomas ChanSponsors performing continuous supervision duties during the Reporting PeriodNameTianfeng Securities Co.,Ltd Office AddressBuilding 2,Tianfeng Mansion,No.217 Zhongbei Road,Wuchang District,Wuhan,Hubei ProvinceName of the signing sponsorLU Yongwei,ZHOU JianwenPeriod of continuous supervisionFrom 15 February 2022 to 31 December 20232023 Annual Report15CITIC Securities Company LimitedCompany InformationSponsors performing continuous supervision duties during the Reporting PeriodNameChina Post Securities Co.,Ltd.Office Address17 Zhushikou Dong Street,Dongcheng District,BeijingName of the signing sponsorCUI Pingping,LI YongPeriod of continuous supervisionFrom 15 February 2022 to 31 December 2023Legal Advisers as to PRC LawsNameJia Yuan Law OfficesLegal Advisers as to Hong Kong LawsNameJia Yuan Law OfficesA Share RegistrarNameCSDC,Shanghai BranchOffice AddressNo.188 Yanggao South Road,Pudong New Area,ShanghaiH Share RegistrarNameComputershare Hong Kong Investor Services LimitedOffice AddressShops 17121716,17/F,Hopewell Centre,183 Queens Road East,Wanchai,Hong Kong16Company InformationAwards in 2023 The CompanyIssued byName of AwardsShanghai Stock ExchangeExcellent Options Market Maker,Top 10 Options BrokersShenzhen Stock ExchangeExcellent Corporate Bond Underwriter,Excellent Bond Market Maker,Excellent Fixed-Income Innovative Product IntermediaryChina Association for Public CompaniesBest Practice Awards for Board Office in 2023(2023年度董事會最佳實踐案例),Best Practice Cases of Annual Report Performance Briefing of Public Companies in 2022(上市公司2022年報業績說明會最佳實踐案例)China Institute of Internal AuditNational Advanced Group of Internal Audit 20202022(20202022年度全國內部審計先進集體)Bond Connect Company LimitedOutstanding Investors in Northbound under Bond Connect(Investment Banking)(債券通北向通優秀投資者(投資銀行類),Innovation Award in Cross-Border Subscription(跨境認購創新獎),Excellent Northbound Market Maker(北向通優秀做市商)International Finance Forum(IFF)The 4th IFF Global Green Finance Award Innovation Award(第四屆IFF全球綠色金融獎 創新獎)Asia RiskBest Equity Derivatives Institution for 2023(2023年度最佳股權衍生品機構)InterbrandTop 50 Best Brands in China for 2023(2023中國最佳品牌排行榜50強)International Finance Review(IFR Asia)Best Equity House in China for 2022(2022年度中國最佳股權融資投行)New FortuneThe 16th New Fortune Best Investment BankNo.1 Best Local Investment Bank,No.1 Best Investment Bank in Equity Underwriting,No.1 Best IPO Investment Bank,No.1 Best Refinancing Investment Bank,No.1 Best Investment Bank in Serving Overseas Markets,Best Practice ESG Investment BankSecurities Times2023 Jun Ding Award for Securities Investment Bank in ChinaFull-Service Investment Bank,Equity Financing Investment Bank,Overseas Investment Bank2023 Jun Ding Award for Securities Industry Asset Management in ChinaFull-Service Asset Management Institution,Asset Management Equity Team,Asset Management Quantitative Team2023 Jun Ding Award for Securities Industry Wealth Management Broker in ChinaFull-Service Institution BrokerThe 14th Tianma Award for Investor Relations of Chinese Listed CompaniesBest Investor Relations Award for Chinese Listed Companies2023 Annual Report17CITIC Securities Company LimitedCompany InformationIssued byName of AwardsWind InfoWinds Best Investment Bank for 2022Best Investment Bank,Best A-Share Equity Underwriter,Best H-Share IPO Sponsor,Best China M&A Financial AdvisorBest Bond Underwriter Securities Company,Best Credit Bond Underwriter Excellent Securities Trader Award,Best Asset-backed Securities UnderwriterTop 100 ESG Best Practices of Chinese Listed Companies in 2023China Securities Journal2023 Golden Bull Award in Chinese Securities IndustryGolden Bull Award of Top Ten Securities Companies,Golden Bull Award for ESG of Securities Companies,Golden Bull Award for Culture Construction of the Securities Industry,Golden Bull Investment Bank Team Award,Golden Bull Wealth Management Team AwardCAIJING Magazine2023 Institutions with Most Contribution in STAR Market,2023 Evergreen Award Sustainable Development Benefits AwardFinancial Times2023 Best Securities CompanyFinance AsiaCountry Awards for Achievement 2023Best Equity Deals in China Onshore:Postal Savings Bank of Chinas(PSBC)A-share non-public offeringBest Infrastructure Deals in China Onshore:Huaxia Fund-China Resources Nest Rental Housing REITBest M&A Deals in China:Aramcos RMB24.6 billion investment into Rongsheng PetrochemicalThe AssetAsset Triple A Awards 2023Best Custodian,Private Funds in China Onshore,Best in Fund Administration,Mutual Funds in China Onshore,Best Custodian Securities Company in ChinaOnshore(Highly Commended),Best Custodian,Serving Case(China)Sina Finance2023 China Enterprise ESG Golden Responsibility AwardBest Securities Company for Responsible Investment AwardNational Business Daily2023 Top 30 Listed Chinese Securities Companies in Terms of Brand Value,Golden Tripod Awards for the Most Influential Custody Broker,Golden Tripod Awards for the Annual Best A-Share Underwriting Team,Golden Tripod Awards for the Most Powerful Broker for Assets ManagementChina Fund NewsYinghua AwardsDemonstrative Brokerage Company for 25-Year Fund Sales(Mutual Funds),Demonstrative Brokerage Company for Outstanding Wealth Management,Outstanding Private Custody Securities Demonstration Institution,Demonstrative Brokerage Company for Outstanding Asset Management,Demonstrative Brokerage Company for Asset Management in Quantification18Company InformationIssued byName of AwardsHong Kong Ta Kung Wen Wei Media Group2023 Best ESG Financial Service PFund and Wealth Management Jie Fu AwardsOutstanding Custodian,Outstanding Administrator,Outstanding Offshore Administrator,Outstanding WFOE Service Institution CLSA LimitedIssued byAwardsAsiamoneyAsiamoney Brokers Poll 2023No.1 Best Brokerages for Corporate Access in Asia(Excluding Australia&Japan)Finance AsiaCountry Awards for Achievement 2023Best IPO Asia,Best IPO SEA,Best Property Deal Asia,Best Chinese Offshore BondsThe AssetAsset Triple A Awards 2023Best Fund Administration Mandate Alternatives(Hong Kong)The Hong Kong Limited Partnership Fund AssociationThe Hong Kong Limited Partnership Fund Association Annual Awards 2023Best Provider of Fund Administration Services CITIC Securities(Shandong)Issued byAwardsThe Securities and Futures Association of QingdaoAdvanced Unit on Investor Protection in Qingdao for 2023 GoldStone InvestmentIssued byAwardChina Securities JournalThe 7th Golden Bull Brokers Equity Investment Annual WinnerZero2IPO Group2023 Top 6 Private Equity Investment Institutions in ChinaCVINFO2023 Top 10 Private Equity Investment Institutions Most Concerned by LP in China,2023 Top 10 Best State-Owned Investment Institutions in China 2023 Annual Report19CITIC Securities Company LimitedCompany Information CITIC FuturesIssued byAwardThe Peoples Bank of ChinaThird Prize of the 2021 FinTech Development AwardChina Financial Futures ExchangePlatinum Award for Outstanding MemberInsurance Asset Management Association of ChinaMost Popular Futures Company for Insurance Funds,Most Popular Futures Companyfor Insurance Funds(Stock Index Options Business,Treasury Futures Business)Xinhuanet2023 Excellent Case of Corporate ESG Rural RevitalizationSecurities Times2023 Jun Ding Award for Futures Industry in ChinaLeading Futures Company in China,Outstanding Village Revitalization FuturesCompany in ChinaFutures Daily,Securities TimesThe 16th Best Operating Futures InstitutionFutures Market Thirty-Year Hua Zhang Award in China,Best Futures Company in China China AMCIssued byAwardChina Securities JournalGolden Bull Award for Passive Investment Fund Managers,Golden Bull Award20th Anniversary Special Contribution CompanyShanghai Securities NewsGolden Fund Award for Passive Investment Fund ManagersSecurities TimesAward for Star Fund Companies with Three-Year Overseas InvestmentFinancial Summary2023 Annual Report21CITIC Securities Company LimitedFinancial SummaryKey Financial DataKey accounting dataIn RMB millionItems20232022Variance in Comparison with last year(%)2021Total revenue and other income83,72585,941-2.5897,324Operating profit25,54428,277-9.6731,004Profit before income tax26,18528,950-9.5531,894Net profit attributable to owners of the parent19,72121,317-7.4923,100Net cash inflow/(outflow)from operating activities-34,13355,258N/A5,518Items31 December 202331 December 2022Variance in Comparison with last year(%)31 December 2021Total assets1,453,3591,308,60311.061,278,665Total liabilities1,179,1601,050,23112.281,064,857Equity attributable to owners of the parent268,840253,1186.21209,171Total share capital14,82114,82112,927Gearing ratioNote76.5574.52Increasedby 2.03percentagepoints79.18Note:Gearing ratio=(total liabilities customer brokerage deposits funds payable to securities issuers)/(total assets customer brokerage deposits funds payable to securities issuers).22Financial SummaryKey financial indicatorsItems20232022Variance in comparison with last year(%)2021Basic earnings per share (RMB yuan/share)1.301.42-8.451.69Diluted earnings per share (RMB yuan/share)1.301.42-8.451.69Return on weighted average equity(%)7.818.67Decreased by 0.86 percentage point12.07Net capital and relevant risk control indices of the parent companyItems31 December 202331 December 2022Net capital(RMB million)139,615135,852Net assets(RMB million)220,768211,825Total risk capital reserves(RMB million)74,57866,776Risk coverage ratio(%)187.21203.44Capital leverage ratio(%)16.3217.74Liquidity coverage ratio(%)148.28130.53Net stable funding ratio(%)124.86129.46Net capital/net assets(%)63.2464.13Net capital/liabilities(%)19.9523.86Net assets/liabilities(%)31.5537.21Value of proprietary equity securities and derivatives held/net capital(%)51.4235.99Value of proprietary non-equity securities and derivatives held/net capital(%)292.66269.86Note 1:The risk control indices for every business of the parent company are in compliance with the relevant requirements of Administrative Measures for the Risk Control Indices of Securities Companies issued by the CSRC.Note 2:The parent company implemented the relevant provisions of the Interpretation No.16 of the Accounting Standards for Business Enterprises(Cai Kuai 2022 No.31)in 2023,therefore,the net capital and relevant risk indicators at the end of last year are restated.2023 Annual Report23CITIC Securities Company LimitedFinancial SummaryFinancial Data for the Last 5 YearsOperating resultsIn RMB millionItems20232022202120202019Total revenue and other income83,72585,94197,32471,86957,080Operating expenses58,18157,66466,32051,98440,886Share of profits and losses of associates and joint ventures641673890585801Profit before income tax26,18528,95031,89420,47016,995Net profit attributable to owners of the parent19,72121,31723,10014,90212,229Financial positionIn RMB millionItems31 December 202331 December 202231 December 202131 December 202031 December 2019Issued share capital14,82114,82112,92712,92712,117Total equity274,199258,372213,808185,882165,450Equity attributable to owners of the parent268,840253,118209,171181,712161,625Total liabilities1,179,1601,050,2311,064,857867,080626,272Customer brokerage depositsNote 1283,821279,402251,164203,111123,351Funds payable to securities issuers3515,2547121,071273Total assets1,453,3591,308,6031,278,6651,052,962791,72224Financial SummaryKey financial indicatorsItems2023 2022202120202019Dividends per share(RMB yuan/share)0.4750.490.540.400.50Basic earnings per share(RMB yuan/share)1.301.421.691.100.96Diluted earnings per share (RMB yuan/share)1.301.421.691.100.96Return on weighted average equity(%)7.818.6712.078.437.76Gearing ratio(%)Note 276.5574.5279.1878.1075.24Notes:(1)Customer brokerage deposits above represent the amount received from and repayable to clients arising from the normal courses of the Groups securities brokerage business.The fund is restricted and governed by the relevant third-party deposit institutions.(2)Gearing ratio=(total liabilities customer brokerage deposits funds payable to securities issuers)/(total assets customer brokerage deposits funds payable to securities issuers).In RMB100 millionEquity attributable to owners of the parentReturn on weighted average equity%Gearing ratio%2,531.182,688.401,616.251,817.122,091.71202320222021202020198.67%7.81%7.76%8.43.07 23202220212020201974.52v.55u.24x.10y.18 232022202120202019In RMB100 millionTotal revenue and other incomeIn RMB100 millionNet profit attributable to owners of the parentIn RMB100 millionTotal asset859.41837.25570.80718.69973.2420232021202220202019213.17197.21122.29149.02231.002023202220212020201913,086.0314,533.597,917.2210,529.6212,786.6520232022202120202019Management Discussion and Analysis2023 Annual Report25CITIC Securities Company LimitedManagement Discussion and AnalysisDiscussion and Analysis on the Future Development of the CompanyLandscape and trend of the industryChinas central financial work conference has planned to“optimize the financing structure,give full play to the pivotal role of the capital market,deeply and solidly advance the registration-based initial public offering system,develop diversified equity financing,significantly improve the quality of listed companies,and cultivate first-class investment banks and investment institutions”,which serve as the new guidelines for the development of the capital market.The executive meeting held by Chinas State Council has pledged to take stronger,more effective measures to stabilize the market,improve market confidence and promote the stable and healthy development of the capital market.The systematic adjustment to Chinas financial regulatory system and policies will have a direct and material impact on the future development of the securities industry.The regulatory authorities will comprehensively strengthen the“look-through”regulation of the securities industry and the institutions of the industry in all respects and intensify the crackdown on accounting fraud,offering fraud,market manipulation and other acts violating laws and regulations.Under the direction of“cultivating first-class investment banks and investment institutions”,securities companies have accelerated their business transformation and increased investment in certain key areas,including upgrading the wealth management model oriented to the investment consulting business,enhancing the integrated service capacity of investment banks especially in merger and acquisition and restructuring services,optimizing the institutional business services such as derivatives services,fixed income services and prime brokerage,and promoting international development by means of delivering cross-border services.The concentration of the securities industry has been further increased,primarily driven by differentiated regulation,merger and acquisition,and restructuring.The large and comprehensive securities companies aim to become the main force to serve the real economy and a“ballast stone”to maintain financial stability and make efforts to be better and stronger.Development strategy of the CompanyBound to help enhance the role of capital markets and serve high-quality economic development,the Company strives to become a domestically leading and internationally first-class Chinese investment bank most trusted by clients around the world.The Company will steadfastly take the path of financial development with Chinese characteristics,dedicate all-out efforts to the development of technology finance,green finance,inclusive finance,elderly care finance,and digital finance,and support Chinese modernization by offering high-quality financial services.Further,the Company will continually plan better for its global operations in a holistic way,develop competence to furnish comprehensive financial services that meet the needs of global customers,and consistently enhance its international competitiveness and clout.Business planIn 2024,the Company will continue to provide customers with comprehensive services across the entire business chain,ramp up support for technological innovation,advanced manufacturing,green development and small and medium-sized enterprises,and build up the quality and effectiveness of the services to the real economy.The Company will fortify its investment capacity and endeavour to introduce more financial products and services featuring both safety and profitability,so as to create long-term and stable investment returns for the clients.The Company will continue to scale up the client base,consolidate its leading position in the domestic market and further enhance its market influence and competitiveness.The Company will continue to improve its integrated management across its global operations,optimize the overall plan for the development of its global operations and elevate its global financial services capabilities.Its business development will be energized by digital innovation and financial services will be refined by leveraging technological means.The Company will reinforce the construction of its internal control system to avoid major risks for good.The Company will further improve 26Management Discussion and Analysisits talent development system and mechanisms and carry on improving the professional talent training and development system.In addition,the Company will strengthen the construction of brand and corporate culture,fulfil its social responsibilities and create greater value for society.Capital requirementIn 2023,the Company conducted all lines of business in an orderly manner,among which,fixed income services and margin financing and securities lending services are in demand of sufficient capital.As of the end of the Reporting Period,the balance of the Groups domestic and overseas short-term and long-term loans,bonds payable and short-term financing instruments payable totaled RMB209,291 million.The Company will strengthen its unified management of domestic and overseas funds,continue to improve its overall capital allocation efficiency and keep exploring new financing products and financing models to ensure the satisfaction of capital needs of business development.Possible risks of exposureAt present,the risks and challenges faced by the world economy are increased.Under the environment of high interest rates,the U.S.and European economies are facing downward pressure,the risk of recession in major overseas developed economic entities is increasing,and the US Federal Reserve has a high probability of cutting interest rates within 2024.With the constant influence of geopolitical factors,local contradictions and conflicts have increased.The complexity,severity and uncertainty of the external environment were enhanced.Domestic economy will constantly recover and grow,and increasingly focus on high-quality development.Domestic risks are mainly concentrated in insufficient effective demand,excess production capacity in certain industries,weak social expectations and various risks and hidden troubles.However,from a comprehensive analysis perspective,favorable conditions outweigh adverse factors.With changes in the internal and external environment,the growth of derivatives,bulk commodities,foreign exchange and other new businesses comes with noteworthy market risks.Financing activities and fixed income product investments,etc.also face changing credit risks.The Company should,in its steady operation,ensure that the risk level is detectable and controllable amid business expansion.Business OverviewAnalysis of principal businessesThe investment banking business of the Group consists of equity financing,debt financing and financial advisory services.The Group provides fund raising and financial advisory services to a wide range of enterprises and other institutional clients in China and globally.The wealth management business of the Group mainly includes securities and futures brokerage business,distribution of financial products and investment consulting services.The institutional stock brokerage business of the Group provides domestic and overseas professional institutional investors client bases with various professional value-added services,including research marketing,transaction execution,equity financing and trading projects recommendation for their investments and trading,in Chinese stock markets and Asia-Pacific,American and other overseas stock markets.The financial market business of the Group mainly includes trading and market-making of equity products,fixed income products and derivatives,foreign exchange business,margin financing and securities lending business,alternative investment and bulk commodity business.Asset management business of the Group includes collective asset management(“CAM”),separately managed account(“SMA”)and specialized asset management(“SAM”),fund management and other investment accounts management.The investment business of the Group mainly comprises alternative investment and private equity investment.The Group also provides services such as custody and research.2023 Annual Report27CITIC Securities Company LimitedManagement Discussion and AnalysisInvestment bankingEquity financingMarket conditionsIn 2023,the offering size of A-share(for cash and asset transactions)amounted to RMB1,134,430 million,representing a year-on-year decrease of 32.74%;the offering size of A-share(for cash)amounted to RMB1,005,059 million,representing a year-on-year decrease of 33.77%.Based on the shares underwritten by lead underwriters,the market share of the top ten securities companies in A-share equity underwriting(for cash)amounted to 73.90%.The offering size of Hong Kong IPO amounted to US$5,884 million,representing a year-on-year decrease of 56.08%;the offering size of Hong Kong refinancing market amounted to US$11,842 million,representing a year-on-year increase of 0.56%.Calculated based on the total offering size distributed evenly among all book runners,the market share of the top ten investment banks in the Hong Kong equity financing market totaled 67.90%.In 2023,the number and offering size of A-share IPOs declined,with a total of 313 enterprises completing the IPO process,representing a year-on-year decrease of 26.87%.The offering size amounted to RMB356,539 million,representing a year-on-year decrease of 39.26%.Refinancing issuance size also saw a decrease,with the total issuance size of refinancing(for cash and assets)amounting to RMB777,891 million,representing a year-on-year decrease of 29.26%.Among them,the total issuance size of private placement(for cash)amounted to RMB449,581 million,representing a year-on-year decrease of 18.58%.The total issuance size of convertible bonds amounted to RMB140,574 million,representing a year-on-year decrease of 48.61%.Actions and achievementsIn 2023,in respect of domestic equity financing,the Company completed a total of 140 A-share lead underwriting projects with an aggregate lead underwriting size of RMB277,913 million(for cash and asset transactions),accounting for a market share of 24.50%and ranking first in the market.Among them,the Company completed 34 IPO projects,with a lead underwriting size of RMB50,033 million,accounting for a market share of 14.03%and ranking first in the market;106 refinancing projects with an aggregate lead underwriting size of RMB227,880 million,accounting for a market share of 29.29%and ranking first in the market.Among the refinancing projects,68 were private placement(for cash)projects with a lead underwriting size of RMB127,755 million,accounting for a market share of 28.42%and ranking first in the market.20232022ItemsLead Underwriting size(RMB million)Number of IssuancesLead Underwriting size(RMB million)Number of IssuancesIPOs50,03334149,83258Refinancing issuances227,880106226,485108Total277,913140376,317166Source:Wind Info and the Companys internal statisticsNote 1:When compiling the above table,the date of completion of an IPO,a public equity issuance,an issuance of convertible bonds/exchangeable bonds,a private placement,a rights issue and an issuance of preference shares is the listing dateNote 2:In the event that the amount attributable to respective underwriter is not specified,the underwriting size of a joint-lead underwriting project is calculated by dividing the total project size with the number of lead underwriters;in the event that the amount attributable to respective underwriter is specified,the underwriting size of a joint-lead underwriting project is calculated on a case-by-case basis28Management Discussion and AnalysisIn 2023,in respect of overseas equity financing,the Company completed a total of 32 overseas equity projects with an underwriting size of US$1,782 million in aggregate calculated on the basis of the total offering size of projects distributed evenly among all bookrunner roles.Among them,12 were IPO projects in the Hong Kong market with an underwriting size of US$153 million,6 were refinancing projects with an underwriting size of US$736 million,ranking second among the Chinese securities companies in respect of equity financing business in the Hong Kong market,and 7 were GDR projects in the European market with an underwriting size of US$445 million,ranking second among the Chinese securities companies.The Company completed 7 equity financing projects in the Southeast Asian market and other overseas markets,with an underwriting size of US$447 million.Outlook for 2024The Company will continue to capitalize on the opportunities presented by the capital market reform and development,comprehensively develop diversified equity financing and serve to deepen and implement the registration system reform.The Company will continuously increase its efforts in the effective development and services to domestic and overseas clients and markets in alignment with national strategies and client needs,step up efforts in industry research and client market analysis,develop its business forward-looking layout,and provide clients with professional service solutions.The Company will persist in its international development efforts,deepen the centralized management for domestic and overseas businesses,expand its international customer base,strengthen its business expansion in equity financing in Hong Kong,GDR,and equity financing in the Southeast Asia and other overseas markets,to constantly enhance its competitiveness in the international market.The Company will provide clients with high-quality investment banking services by leveraging its integrated service and platform strength.Debt financingMarket conditionsIn 2023,the yield rate of the domestic bond market presented a downward volatility trend,and credit spreads were compressed to a low level;the issuance size of domestic bonds increased year-on-year,with the aggregate issuance size of bonds amounting to RMB71.04 trillion,representing a year-on-year increase of 15.45%.In terms of interest rate securities,the issuance size of treasury bonds amounted to RMB11.10 trillion,representing a year-on-year increase of 14.18%,and the issuance size of local government bonds amounted to RMB9.33 trillion,representing a year-on-year increase of 26.78%.In terms of credit bonds,the aggregate issuance size amounted to RMB18.98 trillion,representing a year-on-year increase of 5.07%,among which the issuance size of financial bonds and corporate bonds increased,while the issuance size of asset-backed securitization declined.In the overseas market,as the Federal Reserve of the United States raised interest rates and further tightened the monetary policy,the yield rate of U.S.bond fluctuated at a high level,and the issuance size of offshore bonds issued by Chinese enterprises declined.In 2023,the aggregate issuance size of offshore bonds issued by Chinese enterprises amounted to US$68,199 million,representing a year-on-year decrease of 25.10%.2023 Annual Report29CITIC Securities Company LimitedManagement Discussion and AnalysisActions and achievementsThe Company maintained its leadership in the debt financing business and underwrote a total of 4,200 bonds in 2023,ranking first among securities companies.The total underwriting size amounted to RMB1,909,992 million,representing a year-on-year increase of 21.01%.The Company contributed 6.85%of the total underwriting size of the market,ranking first in the market,and 14.14%of the total underwriting size of securities companies,ranking first among securities companies.20232022ItemsLead Underwriting size(RMB million)Number of IssuancesLead Underwriting size(RMB million)Number of IssuancesEnterprise bonds27,1663139,03345Corporate bonds405,828938354,186722Financial bonds463,254324390,774247Medium-term notes119,57824483,123140Short-term commercial papers27,7066718,78550Private placement notes12,2644010,09233Asset-backed securities210,564835229,811836Convertible bonds/exchangeable bonds28,3462453,97426Local government bonds615,2861,697398,8021,4561,909,9924,2001,578,5813,555Source:Wind Info and the Companys internal statisticsIn respect of offshore bonds issued by Chinese enterprises,the Company completed a total of 134 bond issuances with a total underwriting amount of US$2,418 million,accounting for a market share of 3.55%and ranking first among the Chinese securities companies.In addition,the Company also provided customers with structured and leveraged financing,risk solutions,cross-border liquidity management and other diversified services.Outlook for 2024The Company will continue to provide professional comprehensive debt financing services,strengthen the development of strategic clients such as central SOEs and financial institutions as well as clients in strategic emerging industries,and actively develop overseas clients in line with the national Belt and Road Initiative.The Company will continuously promote innovative debt financing business,increase investment in science and technology innovation bonds,green bonds and rural revitalization bonds,collaborate to build a complete business ecology from Pre-REITs to publicly-offered REITs,and serve the construction of multi-level REITs market.The Company will seize the opportunity of opening up the bond market,give full play to the full-product service advantages of domestic and overseas debt financing,continue to explore the businesses opportunities such as Panda Bonds,and vigorously expand businesses like offshore bonds issued by Chinese enterprises,and U.S.dollar-denominated bonds in Southeast Asia and other overseas markets,so as to improve the competitiveness of its overseas bond business.30Management Discussion and AnalysisFinancial advisory servicesMarket conditionsAccording to Dealogic,in 2023,the total amount of global merger and acquisition transactions announced reached US$3.16 trillion and the number of transactions amounted to 36,700.On a sector basis,the electronics and computer sector was the most active,with the size of merger and acquisition transactions announced amounting to US$548,559 million,accounting for 17.35%of the size of merger and acquisition transactions announced;the medical and healthcare sector followed with the size of merger and acquisition transactions announced amounting to US$440,845 million,accounting for 13.95%of the total amount of merger and acquisition transactions announced.3,132 merger and acquisition transactions involved Chinese enterprises were announced in 2023,with a transaction size of US$342,455 million,of which 435 were cross-border transactions,with a transaction size of US$81,332 million.Actions and achievementsIn 2023,the Company completed many transactions dealing with material assets restructuring of the China-based companies listed on the A-share market;the transaction size amounted to RMB118,070 million,ranking first in the market.The Company completed a number of influential merger and acquisition and restructuring transactions in the market,including the material asset restructuring of Yangtze Power and the material asset restructuring of CECEP Equipment.The size of global merger and acquisition transactions involving Chinese enterprises completed by the Company amounted to US$51,795 million,ranking second among the Chinese securities companies.The Company continued to strengthen its global merger and acquisition business expansion,for instance,assisting Rongsheng Petrochemical in reaching strategic cooperation with Saudi Aramco,a new overseas investor,and assisting the acquisition of a listed company engaging in cement manufacturer in Oman by Huaxin Cement,thereby serving the overseas merger and acquisition of excellent Chinese enterprises.Outlook for 2024The Company will continuously strengthen the construction of merger and acquisition expertise,conduct industry and market research and analysis,initiate merger and acquisition transactions,and consolidate and enhance the market-leading advantages.The Company will actively seize merger and acquisition transaction opportunities such as merger and acquisition and restructuring of central SOEs and SOEs,private equity transactions,control acquisition and risk mitigation,enrich and innovate merger and acquisition professional services,promote the role of merger and acquisition and restructuring in optimizing resource allocation,and help improve the quality of enterprise development.The Company will continuously improve the global network layout,strengthen the business development of outbound merger and acquisition of Chinese enterprises,inbound merger and acquisition of foreign enterprises,and industrial merger and acquisition and privatization of overseas-listed companies,and strengthen the merger and acquisition service capabilities in the international market,so as to increase its competitiveness in global merger and acquisition business.2023 Annual Report31CITIC Securities Company LimitedManagement Discussion and AnalysisThe business of New OTC MarketMarket conditionsThe intensified reform in BSE propelled the ongoing positive evolution of the New OTC Market.In 2023,another 326 enterprises were listed on the New OTC Market,representing a surge of 23.48%year-on-year.Among them,more than 30%enterprises were national-level specialized and sophisticated“little giant”.The private issuance size of enterprises listed on the New OTC Market reached RMB17,120 million.Among them,77 enterprises recorded a financing size of RMB50 million or more,accounting for 15.84%of the above listed enterprises with private issuance.Actions and achievementsThe Company continued to operate the business of New OTC Market on the basis of expanding the customer coverage,and increased the coverage of innovative SMEs by seizing the historical opportunity resulting from the deepened reform of the multi-level capital market.In 2023,the Company,as the chief agency broker of the New OTC Market,completed the listing of seven companies and assisted listed companies in raising RMB561 million through private placement.It continuously supervised a total of 24 listed companies,of which 13 companies have entered the innovation layer.Outlook for 2024The Company will further enhance its business layout in the domains of new technologies,new industries,and new business models.It will delve deeper to identify high-quality clients with a focus on specialization,refinement,distinctiveness,and originality,and endeavor to provide superior investment banking services to innovative SMEs,and help improve the capital markets ability to serve early-stage and growth-stage enterprises.Wealth managementMarket conditionsIn 2023,the SSE Composite Index decreased by 3.70%,the SME Composite Index decreased by 8.47%,and the ChiNext Composite Index decreased by 5.41%.The average daily trading volume of equity funds in the domestic securities market was RMB991.7 billion,representing a year-on-year decrease of 3.10%.The Hong Kong Hang Seng Index decreased by 13.82%,the Hang Seng China Enterprises Index decreased by 13.97%,and the Hang Seng TECH Index decreased by 8.83%.The average daily trading volume in the Hong Kong securities market was HK$105.0 billion,representing a year-on-year decrease of 15.93%.Actions and achievementsIn 2023,the Company focused on refined customer operation in respect of domestic wealth management,optimized the organizational structure,and strengthened the headquarters role in empowering branches and leading business development.The Company built a team of experts from diverse backgrounds,innovated the wealth management service model,and provided comprehensive financial solutions covering the entire life cycle of“People-Family-Enterprise-Society”for customers.With the goal of improving ease of use and satisfaction,the“Xin E Tou”APP version 5.0 was launched to upgrade user investment experience.As of the end of the Reporting Period,the Company had 14.2 million clients on a cumulative basis,and its total assets of clients under custody remained at a RMB10 trillion level,representing a year-on-year increase of 4%;the scale of non-monetary market public funds remained at RMB190.2 billion,ranking first in the industry.The Company accelerated its global layout of overseas wealth management business,established the CITIC Securities Entrepreneur Office(Hong Kong)service brand,officially launched a wealth management platform in Singapore,which has expanded the scope and content of international services,thereby better providing global asset allocation and transaction services for domestic and foreign clients.The Company strengthened its services to high-net-worth clients and accelerated the further transformation of wealth management business through the service model of“Account Manager Investment Consultant”.In 2023,the sales revenue from wealth management products doubled year-on-year,as a result of the increase in overseas high-net-worth clients.32Management Discussion and AnalysisOutlook for 2024The Company will continue to rely on the huge development potential of the wealth management market,adhere to the development direction and path of wealth management,focus on accelerating the building up of buyer service capabilities,promote the all-employee investment advisory development strategy,provide customers with comprehensive financial solutions,better meet residents wealth management needs,and facilitate the achievement of common prosperity,and will finely serve the wealth management needs of key institutional client base which includes listed companies,SOEs and government platforms,financial peers,and professional investment institutions to better fulfill the function of the capital market and help the high-quality development of the real economy.The Company will further improve the global wealth management product and service system,expand the overseas territory of wealth management,and gradually enhance the competitiveness in the global wealth management market.Moreover,the Company will upgrade the wealth management platform,use digital means,and innovate the model of developing wealth management business,so as to optimize the customer service experience and discover the needs of customers,accompany them during the service journey and lead them with the professional value.Institutional stock brokerage businessMarket conditions(refer to the section titled“Wealth management”)Actions and achievementsThe domestic institutional stock brokerage business of the Company mainly covers services for domestic and foreign professional institutional investors such as public funds,insurance companies,private funds,wealth management subsidiaries of banks,QFIs,WFOEs,etc.The Company continued to maintain its overall leading position in the domestic institutional brokerage business in traditional client business.In particular,the ranking of public fund sub-positions commission income in the first half of 2023 continued to be the first in the market;the number of QFI clients increased to 293 in 2023,ranking first in the market;the key private fund account opening rate amounted to 63%.The Company explored the linkage between the primary and secondary markets and deepened multi-dimensional cooperation with equity investment institutions,financial peers and other wealth management institutions in the market.The offshore institutional stock brokerage business of the Company continued to maintain its leading market share in the Asia Pacific region.The Company further expanded its global presence,coordinated the differences between domestic and overseas business models,and built an integrated global institutional stock brokerage business platform.The Company expanded from cash services to asset services,transformed from single business-driven model to a multi-business collaborative model,to provide differentiated and specialized integrated financial services for global clients.Outlook for 2024Relying on domestic and overseas business advantages and customer resources,the Company will continuously promote the integration and expansion of the stock brokerage business for global institutions.The domestic and overseas institutional stock brokerage business will continue to deepen the operation of existing client base,optimize the business synergy within the Group,establish an integrated global stock institutional brokerage business platform,enhance the level of service to its traditional client base,including public,private and foreign institutional clients,while actively expanding its market presence in new fields and new business models,promoting business innovation with a global perspective,and providing support for the trading needs of various types of investors.2023 Annual Report33CITIC Securities Company LimitedManagement Discussion and AnalysisFinancial marketsMarket conditionsIn 2023,the CSI 300 Index decreased by 11.38%and the CSI 500 Index decreased by 7.42%.Large-cap and growth-style stocks underperformed,while low-valuation and high-dividend stocks remained stable,with a significant growth in the artificial intelligence stocks.The communication,media and computer sectors led the way of growth in the overall market,and the sectors in which large central enterprises and state-owned enterprises with low valuations concentrated,such as coal,petroleum and petrochemicals,also showed a moderate upward trend in general,while the real estate-related industry chain sectors declined mostly.In the major overseas markets,the S&P 500 index,Nasdaq index,the European STOXX 50 Index and the Nikkei 225 Index increased by 24.23%,43.42%,19.19%and 28.24%,respectively,while the Hang Seng Index and the Hang Seng TECH Index decreased by 13.82%and 8.83%,respectively.Chinas bond market fluctuated and increased during the year with solid returns,with the China Bond New Composite Index rising by 4.75%.Interest rates for key medium-and long-term maturities of treasury bonds fluctuated and declined to historical low point.Actions and achievementsEquity derivatives business is continuously deepening its product innovation,improving its business layout and expanding its application scenarios,and generally maintained a broad customer base,rich product supply,outstanding trading capabilities and stable income.Counter products are also being developed to further enrich the coverage of underlying assets and structural types.In addition,the market-making business is consistently ranking among the top in the market,making the Company one of the first to launch market-making trading of stocks on the STAR Market,providing high-quality liquidity to the market.Moreover,overseas equity derivatives business transactions cover international mainstream markets,and provide clients with one-stop investment trading services in global markets across time zones.In terms of fixed income business,the Company gave full play to the advantages of customer resources,actively broadened domestic and overseas layout,expanded customer coverage and service network,and built a business platform that closely connected customers and the market.The fixed income business continued to enrich the profit model,improved the comprehensive ability in product design and transaction service,and provided customers with comprehensive financial services.The Company maintained its number one position in the industry in terms of sales scale of interest rate products for consecutive years.In terms of equity proprietary trading business,the Company insisted on focusing on the fundamentals of listed companies,focused on reducing portfolio volatility and enhancing the ability to resist the impact of external macro factors,and expanded various non-directional investment layouts,achieving phased results in model transformation,and basically establishing a diversified business framework.Margin financing and securities lending business,centered on the business philosophy of focusing on customers needs,strengthened the coverage of core customer groups and enriched business scenarios,and maintained a leading market share,and continued to enhance the efficiency of strategy development and trading service provision based on product and service capabilities;the stock pledge business adhered to the business objective of serving the real economy,and the quality of credit assets continued to be optimized,with the growth rate of the scale leading in the market;and the overseas business,with its increasingly enriched product systems and business modes,further enhanced the business management capability while achieving growth in the business scale.The alternative investment business uses new technologies such as artificial intelligence to continuously iterate existing strategies,accelerate the development of new strategies,enrich the variety of strategies,diversify portfolio downside risks and actively and effectively adjusted its strategic allocation according to the characteristics of market styles to continuously improve the efficiency of capital utilization.34Management Discussion and AnalysisThe commodities business continuously provided good risk management for industrial customers and asset allocation services for financial institutions.With risk management,product innovation,system support and comprehensive financial services as its core competitiveness,it further improved its quality and efficiency in serving the real economy,aiming at being a major service provider for comprehensive solutions to the price risk of commodities for domestic industrial customers,the first-class trader and market maker in domestic and foreign commodity derivatives markets,further strengthening the breadth of customer market coverage and depth of customer service,and maintaining its leading position in the industry.Outlook for 2024The equity derivatives business will stick to a customer-oriented principle and create value for customers,further establish specialized platform features in improving product supply and enriching the integrated service ecology,etc.It will continuously improve trading and risk control capabilities,promote digital operation,focus on specialized features,build an international integrated business platform,and provide customers with a global multi-market and all-day one-stop investment and trading experience and integrated financial services.In terms of cross-border derivatives business,the Company will benchmark the derivatives business of world-class investment banks,improve the ability in product design and trading service,enrich product lines,consolidate the advantage of“Chinese assets”,and strengthen international and regional layout,so as to become a stock derivatives provider with strong international competitiveness in the Asia-Pacific region in the medium-and long-term.The fixed income business will make further efforts in the exploration of the customer market,grasp emerging business opportunities,enrich the product system,and provide diversified and targeted comprehensive financial service solutions centered on customer needs.We will continue to develop cross-border business,unceasingly explore domestic and foreign customer resources,boost the development of business innovation,and promote the joint development of domestic and overseas business.The equity proprietary trading business will optimize its investment research system,strengthen the integration of macro,meso and micro research,develop a multi-strategy business platform,strengthen the basic system platform and investment capacity,improve business stability and return certainty,and enhance its capital utilization capability.Margin financing and securities lending and stock pledge businesses will continue to comprehensively enhance the business management capabilities,strengthen the compliance and risk management capabilities,continue to optimize the layout of domestic and overseas business,reinforce the differentiation management of customer bases and the construction of regional business centres,continue to enrich the types of products and strategies,optimize customer marketing,service,pricing and risk management models,cultivate the ability to manage international assets and serve international customers,and continue to provide domestic and foreign investors with comprehensive financial services of all categories,links and processes.2023 Annual Report35CITIC Securities Company LimitedManagement Discussion and AnalysisThe alternative investment business will focus on continuous research and development in terms of data,factors and models to develop new strategies for both domestic and overseas markets.It will increase investment and research in the non-factor part of the business,and improve the profitability of the strategies in terms of factor combinations and multi-cycle optimization.In terms of customer market,the commodities business will strengthen regional synergy,subdivide industry coverage,and optimize customer structure;in terms of product provision,we will continue to enrich the application scenarios of commodity derivatives,provides precious metal trading services for the whole industry chain,increase the supply of anti-inflation products and strategies,and provide high-quality risk hedging and investment allocation tools for customers around the world.Asset ManagementMarket conditionsIn 2023,the asset management industry grew modestly in scale and made steady progress around the direction of high-quality development,with each sub-sector showing differentiated development characteristics.In the future,asset management organisations should continue to enhance their core competitiveness around investment management,risk management,customer service,product layout,etc.,so as to promote the transformation and development of the real economy and protect and escort the value of peoples property.Asset management business of the Company and CITIC Securities AM Actions and achievementsIn 2023,CITIC Securities AM officially commenced operation,marking a smooth transition of the Companys asset management business to CITIC Securities AM for diversified licensed operations.On the domestic business front,the Company received an A grade for corporate fundamentals in the evaluation conducted by the National Council for Social Security Fund.It promoted the transformation towards active management and the construction of specialization,systematization and refinement,further optimized its banking business structure,and strengthened the development of corporate client bases,resulting in an increase in both the number and scale of corporate clients.The overseas asset under management(“AUM”)witnessed steady growth,with the successful issuance of two public funds and the launch of Cross-boundary WMC products.As of the end of the Reporting Period,the total AUM of the Company amounted to RMB1,388,461 million,including CAM,SMA and SAM,with a size of RMB297,704 million,RMB841,715 million and RMB249,042 million respectively.The market share of the Companys privately-offered asset management business(excluding pension business,publicly-offered collective investment schemes and asset-backed securitization products)was 13.71%,ranking first in the industry.AUM(RMB million)Income from Management Fee(RMB million)Category2023202220232022CAM297,704503,3071,0491,507SMA841,715914,4859941,366SAM249,042275,2715073 Total1,388,4611,693,0632,0932,946Source:Statistics from the CompanyNote:The AUM includes both the Company and CITIC Securities AM.The CAM includes collective investment schemes,excluding pension products;the SMA includes pension business;and the SAM includes asset-backed securitization products.36Management Discussion and AnalysisOutlook for 2024The Company will adhere to a professional,systematic,and refined investment research management philosophy for its asset management business and steadily advance the construction of investment research capabilities,so as to form a portfolio management model that matches the attributes of funds and enhance investors experience.The Company will continue to improve its capabilities in asset discovery,risk pricing,and customer service.CITIC Securities AM will actively promote the application for public offering licenses,continue to optimize the structure of domestic business,build competitive advantages in asset management with investment banking characteristics,and provide comprehensive services with all scenarios and diversification around customer needs.The Company will expand the scale of cross-border business and enrich the spectrum of product strategies.China AMCActions and achievementsIn 2023,China AMC maintained industry leadership in the number of products established,with medium-term results in its equity funds ranking the top in the industry.The performance of its social security investments was outstanding,and its ETF scale and incremental growth maintained industry leadership.The scale of its monetary funds achieved rapid growth.It actively promoted the three pillars of pension business,led the development of consumer REITs business,officially obtained the license for equity investment subsidiary,and efficiently empowered business development with several leading technological applications.Continuously strengthening team building,China AMC further increased its assets under management.As at the end of the Reporting Period,the total AUM of China AMC reached RMB1,823,564 million,of which,the AUM of public funds reached RMB1,317,644 million and the AUM of institutional and international businesses reached RMB505,920 million.Outlook for 2024China AMC will continue to uphold the principle of high-quality development.It will persistently improve its product portfolio while reinforcing its core investment research and asset allocation capabilities to consolidate the advantage of its traditional business.Additionally,China AMC will lead the development of innovation business,and expand the scale and scope of its institutional and international business.It will also promote the Companys digital transformation and strengthen the human resources system,thereby maintaining its comprehensive competitiveness in the industry.CustodyMarket conditionsIn 2023,due to the market performance,the growth of public fund size slowed down and the asset size of public funds reached RMB27.60 trillion at the end of the year.The reform of the public fund rate was conducted orderly,the reform in the investment side continued to advance,and the structural reform of supply side achieved preliminary success.Regulations on the Supervision and Administration of Private Investment Funds(私募投資基金監督管理條例)was officially issued and came into force,under which.the efforts to supervision were continuously strengthened,the admittance threshold of the industry continued to raise,the growth of filing private funds slowed down,and the asset size of private funds reached RMB20.58 trillion at the end of the year.2023 Annual Report37CITIC Securities Company LimitedManagement Discussion and AnalysisActions and achievementsIn 2023,the Company continued to enhance its customer service network,focused on improving its capabilities to address customer demand and research and develop new services,and took the lead in the industry by introducing a range of innovative service solutions:CITICS Investment Services Company Limited(中信中證投資服務有限責任公司),a subsidiary of the Company,was the first batch to register through a private investment fund electronic contract service agency;the Company pioneered a new generation of real-time transfer agency(RTA)service in the industry.The Company successively launched a suite of services such as artificial intelligence filling,asset pricing,private fund auditing,automated settlement of funds and the Argos fund investment research platform,among others.The Company also provided the first Hong Kong Limited Partnership Fund(LPF)in the offshore fund service and launched a foreign currency funds clearing system platform.The Company continued to facilitate cross-business synergies and regional collaboration mechanisms to ensure that customer demands for services across markets,channels and product lines were met.As of the end of the Reporting Period,the Companys asset custody and fund outsourcing business experienced steady growth.The Company provided asset custody services for 15,014 products and fund outsourcing services for 16,983 products.Outlook for 2024The Company will enhance the convenience and universality of services for investors,enrich the service categories for professional investment institutions,consolidate and increase the market share of private securities fund,public fund and offshore fund services,actively seek other qualifications for custody business,and participate in the construction of the Companys digital integrated institutional customer service ecosystem to contribute to the high-quality development of the financial services industry.Equity investmentMarket conditionsIn 2023,Chinas equity investment market as a whole continued its downward trend.According to Zero2IPO Researchs data,in terms of fundraising,the number of new funds raised in Chinas equity investment market in 2023 was 6,980,representing a year-on-year decrease of 1.1%;the total amount was RMB1,824.471 billion,representing a year-on-year decrease of 15.5%.In terms of investment,the number of investments in Chinas equity investment market in 2023 was 9,388,representing a year-on-year decrease of 11.8%;the disclosed investment amount was RMB692.826 billion,representing a year-on-year decrease of 23.7%.Among the investments,state-owned investment institutions remained highly active,guiding market capital injection into semiconductor,new energy,automotive and other fields.In terms of exits,the number of exits in Chinas equity investment market in 2023 was 3,946 in total,representing a year-on-year decrease of 9.6%.The number of IPO of invested enterprises A Shares exits in 2023 was 1,348 in aggregate,representing a year-on-year decrease of 38.3%,against the backdrop of a periodic slowdown in new share issuance in Shanghai and Shenzhen.CITIC Securities InvestmentActions and achievementsCITIC Securities Investment actively supported the national strategic needs,carried out a systematic layout around strategic emerging industries,deeply explored high-quality enterprises in fields such as new industrialization,transformation and upgrading of the manufacturing industry,independent innovation and cutting-edge technology,focused on enterprises with great growth potential and leading product technology advantages,empowered invested enterprises through synergies,and steadily deployed its investment resources in fields such as advanced intelligent manufacturing,new energy,information technology,new materials and biotechnology.38Management Discussion and AnalysisOutlook for 2024CITIC Securities Investment will continue to enhance its research transformation capabilities,implement the ESG investment concepts,continue to be guided by the national strategic needs,endeavour to serve the real economy and scientific and technological innovation,further increase the certainty of investment,and steadily deploy high-level scientific and technological self-reliance and advanced manufacturing industries,so as to inject more vitality into the high-quality development of the economy and society.GoldStone InvestmentActions and achievementsAs a platform for the Company to raise and manage private equity investment funds,GoldStone Investment continued to give play to its own advantages in fundraising,and completed the filing of new funds of RMB16.790 billion in 2023.GoldStone Investment,as a fund manager,supported the layout of emerging industries in line with the national strategies by way of equity investment,continued to invest in technology innovation enterprises that served the real economy,undertook the construction of major national projects,broke through the“stranglehold”key technologies,ensured the stability of industrial chain supply,and implemented the carbon peaking and carbon neutrality strategies.It had invested in a number of enterprises with core competitiveness in fields such as new materials,new energy,new generation of information technology,high-end manufacturing,healthcare and modern services to support the national science and technology innovation strategies by way of equity investment.From the establishment of the first REITs fund in China in 2014 to the end of the Reporting Period,CITIC GoldStone Fund,a wholly-owned subsidiary of GoldStone Investment,has cumulatively established property private funds of approximately RMB34.982 billion,ranking the forefront among the property funds with the cumulative management scale in China.Outlook for 2024GoldStone Investment adopts the method of“top-down,research first”to explore investment targets,and will continue to focus on enterprises with forward-looking technology and high-tech barriers in national strategic emerging industries,and continuously empower enterprises in post-investment management to enhance the industrial value.ResearchIn 2023,the research business achieved the integration of domestic and foreign teams,gave full play to the value of research,continued to expand the coverage of global listed companies and enterprises,actively served the Companys domestic and foreign customers,comprehensively and systematically supported the Companys various businesses,and created a multi-dimensional brand influence.Research is conducted both domestically and internationally to achieve bi-directional product conversion and service provision.Throughout the year,our domestic team covered 2,400 listed companies and 1,000 unlisted enterprises,while our foreign team covered 1,300 listed companies.We actively explore new models of research business and launch comprehensive research services such as industrial research and ESG consulting for corporate clients.Throughout the year,there were over 3,000 new service agency clients both domestically and internationally,covering a total of 15,000 institutional clients.Throughout the year,88 on-site conferences were held domestically,covering 24 provinces and municipalities,providing strong support for regional customer development,and 4 large-scale forums were held overseas.The number of citations in the mainstream media and reading volumes on various platforms of research viewpoints has continued to increase,while market influence,industrial influence,and social influence have continued to increase.The Company undertakes various major projects and provides important intellectual support to government authorities.2023 Annual Report39CITIC Securities Company LimitedManagement Discussion and AnalysisIn 2024,the research business will further expand its research influence,improve the level of global integration research,and consolidate its leading advantages.The research business will further expand the research coverage of listed companies and the service coverage of institutional
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To build a net zero energy future with electricity and innovative solutions and services,to help save the planet and drive wellbeing and economic developmentINCLUDING THE ANNUAL FINANCIAL REPORTUNIVERSAL REGISTRATION DOCUMENT 2023Content/AFR/This information is part of annual financial report,as required by Article L.451-1-2 of the French Monetary and Financial Code.1.The Group,its strategy and activities51.1Key figures and business model/AFR/61.2Group presentation101.3Group strategy and objectives/AFR/161.4Description of the Groups activities211.5Research&development,patents and licences1012.Risk factors and control framework/AFR/1052.1Risk management and control of activities1062.2Risks to which the Group is exposed1143.Non-financial performance/AFR/145Corporate social responsibility issues and commitments1463.1Carbon neutrality and the climate1503.2Preserving the planets resources1763.3Well-being and solidarity1933.4Responsible development2223.5CSR Governance2373.6Methodology2423.7Appendices and Independent Third-Party report2493.8Vigilance plan2784.Corporate governance/AFR/2914.1Corporate Governance Code2924.2Members and functioning of the Board of Directors2944.3Executive Management 3254.4Conflicts of interest and interests of corporate officers and executives3274.5Shareholdings of the corporate officers in the Companys share capital3284.6Remuneration and benefits of the corporate officers 3285.Financial performance and outlook/AFR/3335.1Review of the financial situation and results 20233345.2Subsequent events until closing of accounts3565.3Subsequent events to closing of accounts3565.4Changes in market prices at the end of February 20243566.Financial statements/AFR/3576.1Consolidated financial statements at 31 December 20233586.2Statutory auditors report on the consolidated financial statements4866.3EDF SA financial statements at 31December 20234916.4Statutory Auditors report onthefinancial statements5616.5Dividend policy5656.6Other information5666.7Information on the allocation of the funds raised as part of EDFs green financing5687.Information about the Company and its capital5797.1General information about the Company5807.2Incorporation documents and articles of association5837.3Information regarding capital and share ownership/AFR/5857.4Transactions with related-parties5907.5Material contracts/AFR/5938.Additional information5958.1Person responsible for the Universal RegistrationDocument and the Certification/AFR/5968.2Auditors Statutory Auditors5968.3Publicly available documents LEI number5978.4Concordance tables5988.5Glossary605EDF|Universal Registration Document 20233UniversalRegistrationDocument 2023Including the annual financial reportBE THE ENERGY FOR CHANGEThis Universal Registration Document(URD)was filed on 4 April 2024 with the French Financial Markets Authority(AMF),the competentauthority under Regulation(EU)2017/1129,without prior approval in accordance with Article 9 of that Regulation.This Universal Registration Document may be used for the purposes of an offer of securities to the public or the admission of securities totrading on a regulated market if it is supplemented by a securities note and,if applicable,a summary and any amendments made to theUniversal Registration Document.The set of documents formed thereof is approved by the AMF in accordance with EU Regulation 2017/1129.This document is a translation into English of the Universal Registration Document issued in French and it is available on the Companyswebsite.All possible care has been taken to ensure that the translation is an accurate presentation of the original.However,the version of theURD issued in French is the only binding version.Copies of this 2023 Universal Registration Document are available free of charge from EDF(22-30,avenue de Wagram,75382 Paris cedex 08)and on its website(https:/www.edf.fr),as well as on the AMFs website(https:/www.amf-france.org).This document should be read with the reading caveats on the last page of this document available by clicking here.www.edf.fr4EDF|Universal Registration Document2023The Group,its strategy and activitiesEDF|Universal Registration Document 202351.1Key figures and business model61.2Group presentation101.2.1Organisation of the Group101.2.2Group history121.2.3Significant events141.3Group strategy and objectives161.3.1Environment and strategic challenges161.3.2Strategic priorities 161.4Description of the Groups activities211.4.1Electricity generation activities211.4.2Sales and supply activities inFrance521.4.3Optimisation activities in France571.4.4Regulated transmission and distribution activities in France581.4.5International activities691.4.6Energy services and other activities941.5Research&development,patents and licences1011.5.1R&D programmes1011.5.2Intellectual property policy1031.Key figures and business model1.1Key figures and business model1.www.edf.fr6EDF|Universal Registration Document2023The Group,its strategy and activitiesCarbon intensity trajectory(In gCO2/kWh)Net installed renewable capacity by sector at end-2023Installed capacities(1)Net investments excluding disposal plan(1)Consolidated data.(1)Including sea energy:0.24GW.(2)Biomass,geothermal energy.(1)Mainly thermal maintenance,gas,property,central functions.(2)Including Hinkley Point C,Flamanville 3,EPR2.EDF Carbon trajectoryEDF,the renewable energyleader in Europe(1)EU27 value in 2022,European Environment Agency.Key figures2023More than 6 times lower than the European average.Solar powerOtherWind37.7 GWHydropower(1)Fuel OilGasCoalOther EnRHydropower117.3GWNuclear20222023139.7143.5 0.4 GW4.7 GW9.9 GW22.6 GW(2)467.6TWh92.8%Low-carbon production(3)Fuel OilCoalNuclear77.7%9.1%6.1%0.1%1.0%Other EnR6.0%ServicesNew nuclear(2)RenewablesNuclear maintenance(France,Belgium and UK)including Grand CarnageNetworks19.1 billionGas,ThermalOther(1)0.64.50.35.34.90.62.5France Generation and supply activities:24.7France Regulated activities(1):3.7United Kingdom:4.0Italy:1.9Other international:0.9Other activities:3.3 Framatome:0.3EDF Renewables:0.9Dalkia:0.4Framatome0.402022-5-540202339.92022202318.5-12.7-15202022202354.464.5075Electricity generation(1)(1)Generation by fully consolidated entities.(2)Hydropower generation including pumped storage consumption and sea energy.(3)Direct CO2 emissions related to generation,excluding life cycle analysis(LCA)of the means of generation and fuels.GasHydropower(2)Solar powerOtherWind37.7 GWHydropower(1)Fuel OilGasCoalOther EnRHydropower117.3GWNuclear20222023139.7143.5 0.4 GW4.7 GW9.9 GW18%1%3X.6 GW20302050202320222021485037030(2)467.6TWh92.8%Low-carbon production(3)Fuel OilCoalNuclear77.7%9.1%6.1%0.1%1.0%Other EnR6.0%France Generation and supply activities:24.7France Regulated activities(1):3.7United Kingdom:4.0Italy:1.9Other international:0.9Other activities:3.3 Framatome:0.3EDF Renewables:0.9Dalkia:0.4Framatome0.402022-5-540202339.92022202318.5-12.7-15202022202354.464.5075GasHydropower(2)Solar powerOtherWind37.7 GWHydropower(1)Fuel OilGasCoalOther EnRHydropower117.3GWNuclear20222023139.7143.5 0.4 GW4.7 GW9.9 GW18%1%3X.6 GW20302050202320222021485037030(2)467.6TWh92.8%Low-carbon production(3)Fuel OilCoalNuclear77.7%9.1%6.1%0.1%1.0%Other EnR6.0%ServicesNew nuclear(2)RenewablesNuclear maintenance(France,Belgium and UK)including Grand CarnageNetworks19.1 billionGas,ThermalOther(1)0.64.50.35.34.90.62.5Framatome0.4GasHydropower(2)Solar powerOtherWind37.7 GWHydropower(1)Fuel OilGasCoalOther EnRHydropower117.3GWNuclear20222023139.7143.5 0.4 GW4.7 GW9.9 GW18%1%3X.6 GW20302050202320222021485037030(2)467.6TWh92.8%Low-carbon production(3)Fuel OilCoalNuclear77.7%9.1%6.1%0.1%1.0%Other EnR6.0%ServicesNew nuclear(2)RenewablesNuclear maintenance(France,Belgium and UK)including Grand CarnageNetworks19.1 billionGas,ThermalOther(1)0.64.50.35.34.90.62.5France Generation and supply activities:24.7France Regulated activities(1):3.7United Kingdom:4.0Italy:1.9Other international:0.9Other activities:3.3 Framatome:0.3EDF Renewables:0.9Dalkia:0.4Framatome0.402022-5-540202339.92022202318.5-12.7-15202022202354.464.5075GasHydropower(2)Solar powerOtherWind37.7 GWHydropower(1)Fuel OilGasCoalOther EnRHydropower117.3GWNuclear18%1%3X.6 GW20302050202320222021485037030(2)467.6TWh92.8%Low-carbon production(3)Fuel OilCoalNuclear77.7%9.1%6.1%0.1%1.0%Other EnR6.0%ServicesNew nuclear(2)RenewablesNuclear maintenance(France,Belgium and UK)including Grand CarnageNetworks19.1 billionGas,ThermalOther(1)0.64.50.35.34.90.62.5France Generation and supply activities:24.7France Regulated activities(1):3.7United Kingdom:4.0Italy:1.9Other international:0.9Other activities:3.3 Framatome:0.3EDF Renewables:0.9Dalkia:0.4Framatome0.402022-5-540202339.92022202318.5-12.7-15202022202354.464.5075251(1)1.Key figures and business modelEDF|Universal Registration Document 20237The Group,its strategy and activitiesEBITDAIn billions of eurosSalesIn billions of eurosNet income excluding non-recurring itemsIn billions of euros20222023139.7143.5 0.4 GW4.7 GW9.9 GW18%1%3X.6 GW20302050202320222021485037030(2)467.6TWh92.8%Low-carbon production(3)Fuel OilCoalNuclear77.7%9.1%6.1%0.1%1.0%Other EnR6.0%ServicesNew nuclear(2)RenewablesNuclear maintenance(France,Belgium and UK)including Grand CarnageNetworks19.1 billionGas,ThermalOther(1)0.64.50.35.34.90.62.5France Generation and supply activities:24.7France Regulated activities(1):3.7United Kingdom:4.0Italy:1.9Other international:0.9Other activities:3.3 Framatome:0.3EDF Renewables:0.9Dalkia:0.4Framatome0.40GasHydropower(2)Solar powerOtherWind37.7 GWHydropower(1)Fuel OilGasCoalOther EnRHydropower117.3GWNuclear20222023139.7143.5 0.4 GW4.7 GW9.9 GW18%1%3X.6 GW20302050202320222021485037030(2)467.6TWh92.8%Low-carbon production(3)Fuel OilCoalNuclear77.7%9.1%6.1%0.1%1.0%Other EnR6.0%ServicesNew nuclear(2)RenewablesNuclear maintenance(France,Belgium and UK)including Grand CarnageNetworks19.1 billionGas,ThermalOther(1)0.64.50.35.34.90.62.5France Generation and supply activities:24.7France Regulated activities(1):3.7United Kingdom:4.0Italy:1.9Other international:0.9Other activities:3.3 Framatome:0.3EDF Renewables:0.9Dalkia:0.4Framatome0.402022-5-540202339.92022202318.5-12.7-1520GasHydropower(2)Solar powerOtherWind37.7 GWHydropower(1)Fuel OilGasCoalOther EnRHydropower117.3GWNuclear20222023139.7143.5 0.4 GW4.7 GW9.9 GW18%1%3X.6 GW20302050202320222021485037030(2)467.6TWh92.8%Low-carbon production(3)Fuel OilCoalNuclear77.7%9.1%6.1%0.1%1.0%Other EnR6.0%ServicesNew nuclear(2)RenewablesNuclear maintenance(France,Belgium and UK)including Grand CarnageNetworks19.1 billionGas,ThermalOther(1)0.64.50.35.34.90.62.5France Generation and supply activities:24.7France Regulated activities(1):3.7United Kingdom:4.0Italy:1.9Other international:0.9Other activities:3.3 Framatome:0.3EDF Renewables:0.9Dalkia:0.4Framatome0.402022-5-540202339.92022202318.5-12.7-15202022202354.464.5075GasHydropower(2)Solar powerOtherWind37.7 GWHydropower(1)Fuel OilGasCoalOther EnRHydropower117.3GWNuclear20222023139.7143.5 0.4 GW4.7 GW9.9 GW18%1%3X.6 GW20302050202320222021485037030(2)467.6TWh92.8%Low-carbon production(3)Fuel OilCoalNuclear77.7%9.1%6.1%0.1%1.0%Other EnR6.0%ServicesNew nuclear(2)RenewablesNuclear maintenance(France,Belgium and UK)including Grand CarnageNetworks19.1 billionGas,ThermalOther(1)0.64.50.35.34.90.62.5France Generation and supply activities:24.7France Regulated activities(1):3.7United Kingdom:4.0Italy:1.9Other international:0.9Other activities:3.3 Framatome:0.3EDF Renewables:0.9Dalkia:0.4Framatome0.402022-5-540202339.9(1)Regulated activities:Enedis,S and island activities;Enedis,an independent EDF subsidiary as defined in the French energy code.NB:Estimated figures for changes in EBITDA.Net financial debtIn billions of eurosKey figures and business model1.www.edf.fr8EDF|Universal Registration Document2023The Group,its strategy and activitiesModle daffairesAssets and resourcesBusiness modelThe Raison dtre of EDFTo build a net zero energy future with electricity and innovative solutions and services,to help save the planet and drive wellbeing and economic development.2035Industrial and human challenges for all of the Groups business lines,in France and internationally.Generatingmore low carbon electricity with nuclear and renewablesSupporting our customers to reduce their carbon footprintDeveloping networks to meet the challenges of the energy transition*Developingflexibility solutions to meet the needs of the electricity systemCustomer proximity 34.3 million electricity customers 6.6 million gas customers(1)Leading brands:EDF,Edison,Luminus,Dalkia 198.2 million visits on digital consumption monitoring platforms(2)A human ambition 179,550 employees(3)80.6%of employees took part in a skills development initiative during the year(3)An ambitious innovative ecosystem 2,098 R&D employees in EDF SA Consolidated R&D budget of 706 million in 2023(Group scope)747 innovations patented by R&D (EDF&Enedis)at the end of 2023Major industrial assets 117.3 GW of electricity generation capacity(4)An integrated nuclear industry EPR technology A portfolio of wind and solar projects of circa 98 GW gross(5)1.4 million km of distribution networks(6)42.6 million smart meters installed(3)330 heating and cooling networks operated by Dalkia A strong CSR commitment A-rating by Climate Change&Water Security 4th in the WBA Climate and Energy Benchmark ranking 25.3 billion of green&sustainable funding(1)Consolidated scope.Counted per site.(2)EDF SA scope excluding French overseas departments and Corsica.(3)Group scope.(4)Consolidated data at Group scope.(5)Group scope.Pipeline excluding capacity under construction.All the projects in prospection phase included in the pipeline,starting 2020.(6)Enedis distribution network under concession.*In France,the public distribution network is managed independently by Enedis.1.Key figures and business modelEDF|Universal Registration Document 20239The Group,its strategy and activitiesValue creation 2023The breakdown of CSR issues into 16 commitments Ambitious carbon trajectory Carbon contribution solutions Adapting to climate change Developing electricity use and energy services Biodiversity Responsible land management Integrated and sustainable water management Radioactive and conventional waste,and circular economy Security,health and safety for all Ethics,compliance and human rights Equality,diversity and inclusion Energy poverty and social innovation Dialogue and consultation with stakeholders Responsible regional development Development of industrial sectors Data responsible companyFor partners and territories SMEs account for 22,7%of the procurement of EDF and Enedis 1 direct EDF SA job generates 4.3 jobs in France 100%of projects are subject to consultation(6)For the employees An employee engagement index of 74%(7)31.7%of women on the Management Committees(8)An average salary equity ratio(9)of 5.8For the climate and environment A net zero emissions ambition by 2050 Electricity generation of 467.6 TWh,93carbonised(1)with emissions of 37 gCO2/kWh(2)EDF,a water sharing player:water intensity of 0.83 l/kWh(3)New commitments for biodiversity(2023-2025)as part of the Act4nature international initiative and implementation of the new TNFD(4)reporting framework expected by 2025For customers High customer satisfaction level Nearly 390,000 energy advice actions for customer as part of Energy Support Service(5)SuppliersPurchases(10)10.5 bnEDF Group Global CSR agreementStates and TerritoriesTaxes(11)4.1 bnEmployeesRemuneration(12)15.5 bnSharing added value with our stakeholders(1)Direct CO2 emissions related to generation,excluding life cycle analysis of generation plants and fuel.(2)Specific CO2 emissions due to heat and electricity generation.Group scope.(3)Water consumed/total electricity generation of the fleet.Group scope.(4)Taskforce on Nature-related Financial Disclosure(TNFD).(5)EDF SA scope.(6)Projects over 50 million in accordance with the Equator Principles-Group scope.(7)MyEDF Group internal survey.(8)Group scope.(9)EDF SA scope-ratio established in accordance with the guidelines published by AFEP.(10)Consolidated other external expenses.(11)Consolidated taxes,excluding income taxes.(12)Consolidated personnel expenses.Sales139.7 bnEBITDA39.9 bn Net income excluding non-recurring items18.5 bnGroup presentationEDF Inc.17.5%Ocane Re99.9%Groupe EDF Trading100%La Grance Gnrale Foncire100u.5%*80 F International100F Renewables100%IZI Confort 100lkia99.9F Immo100%Socit C3100F Holding SASEDF Pulse HoldingHynamics10000%SOFILO100%Wagram Insurance Company100F Investissements Groupe92.5%lectricit de StrasbourgAgregio Solutions*88.60%CyclifeEnergy2Market(E2M)1000%Domofinance45%Sowee100%IZI Solutions/IZI Solutions Renov100F ENRIZIVIANUWARD*10000vanceCTE*50.1%Enedis100EV100%Framatome*Coentreprise de Transport dlectricit(CTE),a company owning 100%of RTE.*Agregio Solutions is the result of the merger of two existing subsidiaries:Agregio and EDF Store and Forecast(see the press release of 16 May 2023“The EDF Group launches Agregio Solutions for an enhanced offer of flexibility and renewable energy management”).*EDF acquired Assystems 5%share in Framatome,and thus raised its investment to 80.5%(see note14.5“Non-controlling interests”to the consolidated financial statements for the financial year ended on 31 December 2023).*Subsidiary created in 2023.See the press release of 30 March 2023“EDF announces the creation of its subsidiary NUWARD to boost the development of its SMR now entering the basic design phase”.1.2Group presentation1.2.1Organisation of the GroupA simplified organisational chart for EDF group at 31 December 2023 is shown below.The percentages for each entity correspond to theownership interest in capital.The companies or groups of companies within EDF groups scope of consolidation are indicated in note 3.3 ofthe appendix to the consolidated financial statements for the financial year ended on 31 December 2023.The changes in the 2023 scope arediscussed in note 3.1.1 of the appendix to the consolidated financial statements for the financial year ended on 31 December 2023.1.www.edf.fr10EDF|Universal Registration Document2023The Group,its strategy and activities1.Group presentationEDF|Universal Registration Document 202311The Group,its strategy and activities97.2%FS GmbH50F Energy Nuclear Generation Ltd.100%NNB Holding Company(HPC)Ltd.67.7%*Lake Acquisitions Ltd.80F Energy Holding Ltd.100I%Companhia Electrica de Sinop(CES)/Brazil51%Luminus68.6F Trading North America100F Belgium100F Inc./United States82.5F Norte Fluminense/Brazil100%Shandong Zhonghua Power Company Ltd./China19.6tang Sanmexia Power Company Ltd./China350F(China)Holding Ltd.25.6%Meco/Vietnam56.3F Energy UK/United Kingdom100%TDE SpA100F Gas Deutschland100%4.4F InternationalJiangxi Datang International Fuzhou Power Generation Company Ltd./ChinaGroupe EDISON/ItalyNNB Holding Company(SZC)Ltd.49.4%*Taishan Nuclear Power Joint Venture/China*See note14.5“Non-controlling interests”to the consolidated financial statements of the financial year ended on 31 December 2023.Group presentationNationalisation of the electricity and gas sectors.Creation of EDF as an EPIC*inaccordance with the law of8April 1946.Opening of the French market,first for B2B(2000 to 2004),then for B2C(2007).On November 2004,EDF becomes a French SA.IPO of EDF.Spin-off of RTE to guarantee non-discriminatory access tothemarket.Launch of the commercial-scale nuclear programme.Development of the French industrial base,including hydroelectric and nuclear power plants.Start of the international development,first in South America,then in Europe with the United Kingdom(from1998onwards),Germany(2001)andItaly(2005).Buy-out of EDF Renouvelables(formerly EDF nergies Nouvelles).Acquisition of British Energy.19461963199019992004200520112009Structural changes in the EDF groupDevelopment in FranceInternational development*EPIC:Public Industrial and Commercial Establishment.1.2.2Group history1.www.edf.fr12EDF|Universal Registration Document2023The Group,its strategy and activities1.Group presentation2012201420162017Indirect sale of 49.9%of RTE to Caisse desDpts and CNP Assurances and capital increase of approximately 4bn.Acquisition by EDF of Dalkias activities in France.Acquisition of 75.5%ofFramatome capital.Takeover of Edison.Signature of final contracts for Hinkley Point C EPR construction project in the UK.Launch of the Solar Plan.2018Commissioning of the 1st EPR of Taishan.Ramp-up in offshore wind power2019France multi-year energy programme(PPE):project published on 25 January 2019.Launch of“excell”,an excellence plan for the nuclear industry.Success of the first fourth 10-year inspection of 900MW fleet(Tricastin1).Commissioning of Taishan Unit2.Commissioning of the Sinop hydropower plant in Brazil.EDF adopts a raison dtre in its articles ofassociation.Commissioning of the new Romanche-Gavet hydroelectric plant.20202023Acquisition of the entire EDFs share capital by the French State following the squeeze-out of shares and OCEANE.2022Commissioning of the first offshore wind farm inFrance in Saint-Nazaire.Launch of the HydrogenPlan.EDF|Universal Registration Document 202313The Group,its strategy and activitiesGroup presentation1.2.3Significant eventsSignificant increase of 41.4TWh in nuclear generation in France in a context of historically high pricesCOMPLETION OF THE SIMPLIFIED PUBLIC TENDER OFFERFollowing the simplified public tender offer initiated by theFrench State for the equity securities,the squeeze-out of theshares and OCEANEs issued by EDF took place on 8 June 2023.The French State now holds all of EDFs share capital andvoting rights.NUCLEAR46 reactors were online in France at the beginning of January2024,representing 50GW.15 of the 16 reactors most sensitive to stress corrosion wererepaired by end-2023 and the last one will be repaired withduring its 10-year inspection starting in February 2024.Inaddition,the 2023 programme of checks on welds repairedduring reactor construction has been completed.The estimates of nuclear output in France are confirmedat 315-345TWh for 2024 and 335-365TWh for 2025and 2026(1).NUCLEAR NEW BUILDFlamanville3:successful completion of the tests to requalifythe entire installation with a view to the fuel loading,which willbe carried out after obtaining the decision of the FrenchNuclear Safety Authority authorising the commissioning(2).Hinkley Point C:new schedule for the start of power generation by Unit1based on three scenarios:a project organisation for 2029,abase case in 2030,and an unfavourable scenario in 2031(3);revised completion cost:201531 to 34billion(theunfavourable scenario would entail an additional cost of20151billion);impairment of Hinkley Point C assets and EDF Energygoodwill for a total of 12.9billion(4);since end-2023,construction work is financed by theshareholders on a voluntary basis and EDF is currentlyfinancing all costs.Sizewell C:further preparatory work on the project.EPR2:applications have been filed for approval to build the firstpair of EPR2 reactors on the Penly site and the Bugey sitechosen to host two future EPR2 reactors,after the choice ofPenly and Gravelines.EPR1200:EDF has been shortlisted to continue the tenderprocess for the construction of 1 to 4 EPR1200 reactors in theCzech Republic.Nuward SMR(5):joint early review to develop a standardiseddesign with an extended group of European nuclear safetyauthorities.RENEWABLESThe 14%increase in wind and solar generation to 28.1TWh waslargely due to new installed capacities including Al Dhafra(2.1GW in the United Arab Emirates,one of the most powerfulsolar power plants in the world),and Serra do Serid(phase1,480MW in total,in Brazil,the largest wind power farm in SouthAmerica),to reach 15.1GW net.The portfolio of wind and solarpower projects also increased by 15%to 98GW gross.Inauguration of the Lazer floating solar power plant(20MWp)on the Lazer hydro power plant reservoir in France,allowing thecombination of photovoltaic and hydroelectric powergeneration at a single site(6).EDF,in partnership,won the tender for the 1GW MancheNormandie offshore wind power project in France(7).HYDROPOWER The 6.3TWh increase in hydropower generation in France(8)to38.7TWh is explained by high availability rates and betterhydraulic conditions.Completion of the impoundment of the Nachtigal dam inCameroon(420MW).Selection of EDF as a consortium member for the developmentof the Mphanda Nkuwa dam in Mozambique(1.5GW)(9).THERMALEDF continues to decarbonise its thermal power generationwith the conversion to liquid biomass of the Port Est fuel oilpower plant(212MW),making EDFs power generation onReunion Island100%renewable(10).Permanent closure of EDFs last coal-fired power plant in theUnited Kingdom,West Burton A,on 31 March 2023.Edison:inauguration of the 780MW Marghera Levante CCGT(Combined cycle gas turbine).It reduces the CO2 emissions by30%compared to the average for italian thermal fleet and hasthe technological ability to run on up to 50%hydrogen.Successful trial of a bioliquid on the Brennilis combustionturbine in the summer of 2023.(1)Nuclear generation estimate for the fleet currently in operation.(2)See section 1.4.1.1.3.1“Flamanville3EPRproject”.(3)See EDFs press release of 23 January 2024“Hinkley Point C Update”.Previous schedule for Unit1:June 2027 and former cost:201525-26 billion(see EDFs press release of 19 May 2022“Hinkley PointC Update”).(4)See note10.8 of the appendix to the consolidated financial statements for the financial year ended on 31 December 2023.(5)SMR:Small Modular Reactor.(6)See EDFs press release of 20 June 2023“EDF Group opens its first floating solar power plant on the Lazer hydro power plant reservoir in the French Alps”.(7)See the press release of 27 March 2023“EDF Renewables and Maple Power awarded the fourth offshore wind tender launched by the French State,securing a one-gigawatt project off the coast of Normandy,France.(8)Hydropower generation excluding island activity before deduction of pumping consumption.The total cumulative hydropower generation net of pumping consumption represented 33.0TWh in 2023(25.0TWh in 2022).(9)See the press release of 13 December 2023“The consortium of EDF-TotalEnergies-Sumitomo Corporation entered into joint development agreement with the Government of Mozambique for the 1,500MW Mphanda Nkuwa hydropower project.(10)See EDFs press release of 4 December 2023“After the conversion of the Port Est plant to liquid biomass,EDFs power generating fleet in Reunion Island reaches 100%of renewable energy”.1.www.edf.fr14EDF|Universal Registration Document2023The Group,its strategy and activities1.Group presentationCUSTOMERSNew commercial policy:in order to give its customers moreprice visibility and be more competitive,the Group is rolling outa new business policy involving 4 and 5 year ahead auctions onthe wholesale market,and medium-term power supplycontracts.The Group is also developing long-term industrialpartnerships relating to the historic nuclear fleet(nucleargeneration allocation contracts).Decarbonisation uses:the 12.4million tonnes of CO2 emissionsavoided by its customers in 2023 reflect the work done by EDFto encourage greater energy sufficency and electrification ofuses.The number of heat pumps installed was up by 30%,andinstallations of solar panels on rooftops and car park canopieswere up by 60%.In electric mobility,the number of chargingstations rolled out or managed by EDF rose by 21%.1.5%growth in the customer portfolio in the G4(1)countries,comprising France,Italy,Belgium and the United Kingdom,byend-2023.Strategic partnership to reduce the CO2 emissions of La Postesreal estate assets by 35%by 2030(Dalkia,EDF ENR,IZIVIA andUrbanomy)(2).Dalkia:inauguration of a low-carbon geothermal heat networkin the Paris region,powered 77%by renewable energies,avoiding 11,000tonnes of CO2 emissions per year.NETWORKSDeveloping networks to meet the challenges of the energytransition:Connections of renewable energy facilities by Enedis increasedby around 120%and the number of electric vehicle chargingpoints rose by 80%.Investments by Enedis,EDF SEI(3)and lectricit deStrasbourgwere up by 11%,essentially due to the higher number ofconnections related to the energy transition.Electricity supply was restored in 5 days for 95%of customersafter the storm Ciarn.EDF SEI has crossed the milestone of one million digital metersinstalled at end-2023.Enedis recognised first major company of the energy sector tobecome an entreprise mission in June 2023(4).FLEXIBILITYDeveloping flexibility solutions to meet the needs of the electricitysystem via:pumped-storage hydropower plants(PSHP)(5),like the Hattaplant in the United Arab Emirates(250MWh to 1,500MWh ofstorage)under an engineering contract or the Vouglans Saut-Mortier plant in France(87MW);significant gross of 0.8GW in the portfolio of storage projectssecured(to 1.7GW at end-2023);battery projects(as in the United Kingdom for 173MW and inSouth Africa for 257MW);substantial 33%increase in electric vehicule smart chargingpoints operated,mainly by Izi Smart Charge,depending onnetwork constraints.ENVIRONMENTAL,SOCIAL AND GOVERNANCE COMMITMENTSThe worlds number one investor and producer of low-carbonelectricity(6),available on demand and at any time,whichaccounted for 434TWh in 2023,i.e.93%of its power output.EDF has one of the lowest carbon intensities in the world,at37gCO2/kWh,down by 26%from 2022.Definition of new objectives to reduce CO2 emissions,aiming toreach net zero emissions by 2050:a reduction in its Scope1 emissions compared to 2017 of60%in 2025,70%by 2030 and 80%by 2035;a carbon intensity of 30gCO2/kWh by 2030 and 22gCO2/kWhby 2035.Based on Moodys assessment(7)the Groups CO2 emissionsreduction trajectory is in line with a warming scenario of 1.5C.FINANCINGImplementation of the 2023 financing programme:issues ofapproximately 8billion of senior bonds on various marketsand$1.5billion of hybrid bonds.Conversion,by the French State,in equity of all OCEANEsmaturing in 2024,amounting to 2.4billion,contributing to thestrengthening of equity securities.Confirmation of the credit ratings with stable outlook by thethree agencies S&P,Moodys and Fitch(8).EDF successfully launched its first green bond issue dedicatedto the financing of investments in the existing nuclear fleet foran amount of 1billion(9).(1)40.9 million customers per delivery point in France,Italy,Belgium and the United Kingdom.One customer may have two points of delivery.(2)See the press release of 12 December 2023“La Poste and EDF groups join forces to accelerate the energy transition of La Postes real estate assets”.(3)SEI:Systmes nergtiques Insulaires(Island Energy Systems).(4)See Enedis press release of 26 June 2023“Enedis becomes the first major company with a mission in the energy sector”.(5)PSHP:Pumped-storage hydropower plants(Station de transfert dnergie par pompage STEP).(6)Source:Enerdata,Power Plant Tracker in 2022.(7)See“Net Zero Assessment”assessment report.(8)Stability of the financial rating after the addition of an additional notch linked to government support and the downgrade by one notch of the standalone rating.(9)See EDFs press release of 28 November 2023“EDF announces the success of its first senior green bond issue dedicated to the financing of the existing nuclear fleet,for a nominal of 1billioneuros”.EDF|Universal Registration Document 202315The Group,its strategy and activitiesGroup strategy and objectives1.3Group strategy and objectives1.3.1Environment and strategic challengesEnergy efficiency and low-carbon electricity areat the core of the energy transitionThe fight against climate change is the challenge of our generation.While current policies projections would lead to a warming of 2.4C in 2100(1),it is now recognised that to limit this warming to1.5C and uphold the Paris Agreements,it is essential to achieveglobal carbon neutrality by 2050.In Europe,the“Green Deal”developed in2020 and the“Fitfor55”climate package proposed by the European Commission provide theframework of measures enabling the European Union to achievecarbon neutrality by2050.Recovery programmes in the wake of theCovid-19 health crisis have made climate issues an even higherpriority.Similarly,the“REPowerEU”programme announced in2022by the European Commission to address disruptions in the globalenergy market caused by the war in Ukraine adds the challenges ofresilience,sovereignty and maintaining the competitiveness of thisenergy transition.The related national programmes focus onreducing CO2 emissions as a priority,and as competitively aspossible,drawing on a locally-rooted industrial vision.In France,electricity accounts for just over 12%of CO2 emissions(2)(39%(2)at a global level).Frances Climate and Energy Law of8November2019 places the reduction of greenhouse gas emissionsat the heart of French energy policy.The goal is now“to becomecarbon-neutral by2050 by cutting greenhouse gas emissions morethan sixfold”.Frances multi-year energy programme(Programmationpluriannuelle de lnergie,PPE),which lists the broad outlines ofFrench energy policy,sets out a 10-year vision,which is vital formajor industrial players.To achieve these objectives,the major levers of action are:lowering energy consumption by developing energy efficiencysolutions and incentivising energy sobriety;andshifting from fossil fuels to low-carbon energies,prioritisinglow-carbon electricity and renewable heat.The transition to a carbon-free economy should also preservehouseholds purchasing power and the competitiveness ofcompanies,whilst ensuring secure energy supplies and energysovereignty.Innovation,both upstream and downstream,will be an essentialfactor for successfully achieving these goals.1.3.2Strategic priorities EDFs raison dtre is“To build a net zero energy future withelectricity and innovative solutions and services,to help save theplanet and drive well-being and economic development”.It wasincluded in the Companys articles of association at the end of theGeneral Shareholders Meeting of 7May 2020 and is part of theGroups strategy.Today,EDF is the worlds leading producer of low-carbonelectricity(3).For each kWh produced,EDF emits six times less CO2than the average amount for European utilities(251 gCO2/kWh(4)andhas set itself even more ambitious emission reduction targets:in2030,EDF will have reduced its direct emissions by 70%comparedto 2017;in 2035,the reduction in its direct emissions will be 80%.The carbon intensity of the electricity produced by the Group will be30 gCO2/kWh in 2030 and will drop to 22 gCO2/kWh in 2035.EDF isalso committed to reducing its indirect emissions by 28%in 2030compared to 2019.The global context validates the role of low-carbon electricity and supports EDFs strategyThe EDF group,as a responsible operator and supplier,is assumingits role as a major player in the ecological transition and energysovereignty.From the construction and operation of nuclear,hydro,solar,wind and thermal power plants,to the development andoperation of electrical networks,to the marketing and support ofcustomers to achieve energy savings,the Group is present in everylink of the value chain in France and abroad.EDF stands alongsideits customers to promote decarbonisation through energy efficiencyand the electrification of uses,from industrial processes tomobility,as well as in tertiary and residential buildings.To supply its customers,EDF is responding to the growing demandfor low-carbon electricity by accelerating the development of itslow-carbon means of generation.In France,EDF is continuing tooperate the existing nuclear fleet under the best possible conditionsof safety and performance and working on the conditions forlaunching the construction programme of 6 EPR2,with a potentialexpansion to 14 EPR2.Recognised for this know-how,EDF iscommitted to the development of nuclear projects beyond France(Hinkley Point C construction and Sizewell C project in the UnitedKingdom,submission of a bid for the Dukovany site in the CzechRepublic,the Jaitapur site in India,etc.).EDF is pursuingdevelopments in hydropower and accelerating the development ofrenewable energies.In combination with increasing customer connections and new uses,the development of renewables is a major challenge for electricitynetworks:as a responsible operator,EDF group develops andstrengthens distribution networks to guarantee their long-termresilience and performance.As it continues to become increasinglyunstable and volatile,the electricity system will need to be moreflexible:EDF is committed to mobilising a range of solutions to meetthese needs,in order to adapt consumption and production in amore dynamic and responsive manner.(1)Source:International Energy Agency-World Energy Outlook(Global Energy Outlook)2023.(2)Source:Ministry of the Energy Transition,Key climate figures,2023edition,page 35.(3)Source:Enerdata,World ranking of zero direct CO2 emissions power producers(2022,TWh),https:/power-producers- data,EU-27,European Environment Agency,Greenhouse gas emission intensity of electricity generation in Europe,October 2023.1.www.edf.fr16EDF|Universal Registration Document2023The Group,its strategy and activities1.Group strategy and objectivesThe Groups international impact creates value and contributes to Frances successThe Groups core development scope in Europe is the“G4”,comprising France,Italy,Belgium and the United Kingdom.In thesecountries,EDF is present as a key player in electricity generation,aswell as having a significant customer portfolio in each country.Building on its strong local roots,EDF is developing a range of supplyoffers and solutions and services to achieve the decarbonisation ofits customers in a manner best suited to local energy policy choices.In the rest of the world,outside of the“G4”,the Group mainlydevelops through business models without exclusive control of theasset,with an industrial role enabling it to capitalise on the Groupsexperience.EDF will look for growth drivers by engaging in profitableprojects in growing markets,exporting its recognised expertise tocountries seeking practical solutions for a successful energytransition.EDF can thus compare best practices with leadingpartners in competitive markets,while also developing newindustrial skills and accelerating its ability to innovate,from both atechnological and contractual standpoint.At the Group level,project risks are thus diversified.A new(post-ARENH)market modelAt a press conference held on 14 November 2023,Bruno Le Maire,Agns Pannier-Runacher and Luc Rmont announced that they hadreached an agreement between the French State and EDF,layingthe foundations for the new organisation of the French market thatwill succeed the Regulated Access to Nuclear Electricity(Accsrgul llectricit nuclaire historique ARENH)system as of 1January 2026.These guidelines would be intended to be included in a bill to bepresented in 2024.The new market organisation aims to develop medium and long-term products in order to offer consumers a wider choice ofcontracts allowing them to protect themselves from short-termprice volatility and to encourage investments in low-carbonproduction.As part of its new commercial policy,EDF sells annual“ribbons”with maturities of 4 to 5 years at auction,enabling EDF and allelectricity suppliers to offer contracts that provide visibility andstability to customers over these time horizons.In this context,EDFnow offers its customers medium-term retail supply offers of up tofive years.In addition,EDF offers certain electricity-intensive customers long-term industrial partnership contracts,with a minimum period of10years,backed by the historical nuclear fleet(nuclear generationallocation contracts).In order to provide additional protection to customers in the eventof high prices,the public consultation document on the draftprotection system for electricity consumers,dated 23 November2023,provides in particular for the payment by EDF of acontribution comprising a share of the net annual energy revenuesof nuclear power plants when they exceed a certain level.Morespecifically,the proposed system would be based on twothresholds from which contributions on the revenues of the nuclearfleet are to be made:a first activation threshold assessed at thedate of the consultation at 202278/MWh,and a second threshold setat 2022110/MWh,giving rise to two contribution rates of 50%and90%(1)respectively.Supporting our customers to reduce their carbon footprintIndividuals,companies and local authorities are increasingly strivingto change the way they light,heat,produce,consume,travel,etc.Everyone wants to be an actor in their own energy transition.Thismomentum,which is an aggregate of individual initiatives and publicdecisions,is gradually increasing everywhere.In response,EDF is providing accessible and innovative solutionsthat enable customers to consume less and better:by reducing their carbon footprint through the electrification ofuses in the sectors that produce the most CO2:in transport:To support the widespread deployment of electrification in mobility,EDF launched the electric mobility plan in 2018 in the G4countries,aiming to be the leading electricity supplier to the electricvehicle owners segment,having deployed 340,000charging stationsat the end of 2023 to remove technological barriers by enhancingthe storage capacities of electric vehicles(smart charging).In theheavy mobility sector,EDF is committed to the production andmarketing of electrolytic hydrogen and its derivatives.EDF holdsleading positions in the electric mobility sector(France and theUnited Kingdom).in buildings:The Group is very involved alongside professionals in the sector,landlords and local authorities.The aim is to help them in improvingthe energy efficiency of buildings and move towards thedecarbonisation of their uses.It offers a range of services,frommonitoring and managing consumption to direct support fordecarbonisation operations,such as the electrification of heatingwith heat pumps,which enable both energy savings anddecarbonisation,or home renovation offers.EDF also directlysupports households(2)with IZI by EDF and its subsidiary IZI Confort.Lastly,through its subsidiary Dalkia,the Group is activelydeveloping heating and cooling networks to promotedecarbonisation(with the use of renewable energy sources andenergy recovery),while also developing Energy PerformanceContracts(Contrats de performance nergtique-CPE)for publicbuildings,companies,and residential complexes.(1)In accordance with the public consultation document on the draft protection mechanism for electricity consumers dated 23November 2023.(2)They can choose a heat pump to replace their highly CO2 emitting boiler,whether oil or gas-fired.EDF|Universal Registration Document 2023172035Industrial and human challenges for all of the Groups business lines,in France and internationally.Generatingmore low carbon electricity with nuclear and renewablesSupporting our customers to reduce their carbon footprintDeveloping networks to meet the challenges of the energy transition*Developingflexibility solutions to meet the needs of the electricity systemCustomer proximity 34.3 million electricity customers 6.6 million gas customers(1)Leading brands:EDF,Edison,Luminus,Dalkia 198.2 million visits on digital consumption monitoring platforms(2)A human ambition 179,550 employees(3)80.6%of employees took part in a skills development initiative during the year(3)An ambitious innovative ecosystem 1,799 R&D employees(4)Consolidated R&D budget of 706 million in 2023(3)747 innovations patented by R&D(EDF&Enedis)at the end of 2023Major industrial assets 117.3 GW of electricity generation capacity(5)An integrated nuclear industry EPR technology A portfolio of wind and solarprojects of circa 98 GW gross(6)1.4 million km of distribution networks(7)42.6 million smart meters installed(3)330 heating and cooling networks operated by Dalkia A strong CSR commitment A-rating by Climate Change&Water Security 4th in the WBA Climate and Energy Benchmark ranking 25.3 billion of green&sustainable funding(1)Consolidated scope.Counted per site.(2)EDF SA scope excluding French overseas departments and Corsica.(3)Group scope.(4)EDF SA.(5)Consolidated data at Group scope.(6)Group scope.Pipeline excluding capacity under construction.All the projects in prospection phase included in the pipeline,starting 2020.(7)Enedis distribution network under concession.*In France,the public distribution network is managed independently by Enedis.Modle daffairesAssets and resourcesBusiness modelThe Raison dtre of EDFTo build a net zero energy future with electricity and innovative solutions and services,to help save the planet and drive wellbeing and economic development.2035Industrial and human challenges for all of the Groups business lines,in France and internationally.Generatingmore low carbon electricity with nuclear and renewablesSupporting our customers to reduce their carbon footprintDeveloping networks to meet the challenges of the energy transition*Developingflexibility solutions to meet the needs of the electricity systemCustomer proximity 34.3 million electricity customers 6.6 million gas customers(1)Leading brands:EDF,Edison,Luminus,Dalkia 198.2 million visits on digital consumption monitoring platforms(2)A human ambition 179,550 employees(3)80.6%of employees took part in a skills development initiative during the year(3)An ambitious innovative ecosystem 1,799 R&D employees(4)Consolidated R&D budget of 706 million in 2023(3)747 innovations patented by R&D(EDF&Enedis)at the end of 2023Major industrial assets 117.3 GW of electricity generation capacity(5)An integrated nuclear industry EPR technology A portfolio of wind and solarprojects of circa 98 GW gross(6)1.4 million km of distribution networks(7)42.6 million smart meters installed(3)330 heating and cooling networks operated by Dalkia A strong CSR commitment A-rating by Climate Change&Water Security 4th in the WBA Climate and Energy Benchmark ranking 25.3 billion of green&sustainable funding(1)Consolidated scope.Counted per site.(2)EDF SA scope excluding French overseas departments and Corsica.(3)Group scope.(4)EDF SA.(5)Consolidated data at Group scope.(6)Group scope.Pipeline excluding capacity under construction.All the projects in prospection phase included in the pipeline,starting 2020.(7)Enedis distribution network under concession.*In France,the public distribution network is managed independently by Enedis.The Group,its strategy and activitiesGroup strategy and objectivesin industry:The EDF group develops solutions to electrify industrial processes,recover waste heat and produce renewable heating through itssubsidiary Dalkia,and produce decarbonised electrolytic hydrogen.It leverages the expertise of its R&D for its industrial customers tosupport them in the evolution of their production facilities(electricfurnaces and boilers,etc.).It also offers(via its subsidiary AgregioSolutions)the valorisation of flexibilities in the electricity systemand green supply offers.The aim of these solutions is for EDF to avoid the emission of over30 million tonnes of CO2 by2030(1)among its customers:by helping its residential customers,businesses,and localauthorities to play a more substantial role in their energyconsumption(through self-consumption,digital consumptionmanagement solutions);by encouraging,in addition,its customers to consume with moresobriety by sharing advice on virtuous daily habits(the eco-gestures),such as lowering the heating to 19C,by invitingcustomers who are able to do so to shift consumptions awayfrom peak hours for the electricity system or by providing themwith tools to understand their consumption(“EDF&Moi”app).These messages were highlighted in a widespread advertisingcampaign launched in October2022 by EDF called“I lower,I turnoff,I shift”.EDF is enhancing the value of its customer portfolio in“G4”countries(France,the United Kingdom,Belgium and Italy).To do soit relies on its top-notch customer relations and a broad range ofservice offers and solutions,particularly in sustainable energyperformance for the residential or business markets.Innovation is an essential component of the road ahead to helpcustomers in their transition,given the speed at which technologiesare advancing today,from renewables to storage,including electricvehicles,hydrogen and digital development.Building on its own R&D efforts and its innovation ecosystemdeveloped with its partners,the EDF group selects thoseinnovations that have the potential to accelerate the energytransition,while supporting the French industrial fabric as much aspossible.Lastly,the energy transition will only be achieved if it is fair,inclusive and profitable.The EDF group supports its customers byhelping them to use energy more efficiently.EDF pays particularattention to the most vulnerable customers and implementsactions to fight against energy poverty(see section3.3.4“Energypoverty and social innovation”).Generating more low-carbon electricity with nuclear and renewablesBecause in France 96%of electricity generated by EDF isdecarbonised thanks to nuclear and renewable energies,EDF playsa leading role in achieving a carbon neutrality goal by2050.Itsactions aim to accelerate the development of renewable energies inaddition to its nuclear fleet,for which it guarantees safety,performance and competitiveness.There will be no single solution to guarantee low-carbon electricity,but a set of technologies:nuclear,hydropower,solar,onshore andoffshore wind power,low-carbon thermal means of generation.This very low-carbon production ambition is partly based onthe performance of the nuclear sector,by guaranteeingindustrial control,safety,competitiveness,environmentalprotection and optimisation of the operation of nuclear fleetsin France and the United Kingdom.In addition,EDF iscontinuing to implement an innovative fuel cycle strategy.EDFs nuclear generation fleet is the only one of its kind in theworld.The Grand Carnage programme for the existing fleet inFrance is a major industrial challenge.The related investmentsshould enable the power plants to remain in operation beyond40years,guaranteeing nuclear safety,performance,andenvironmental protection.EDFs ambition is to return to the bestlevels of operational generation performance for the existing fleet,and to be able to produce 360 to 400TWh of nuclear electricity inFrance in the long term.Studies are underway to continue operatingthe existing fleet beyond 60years under the best safety conditions,while taking into account feedback from international experiencewith reactors of the same design as those of the French fleet.Thesestudies will be supplemented by in-depth technical studies,whichwill be submitted to the French Nuclear Safety Authority(ASN)before the end of 2025.Nuclear power operation does not emit CO2(2);it provides baselineproduction whilst offering strong leverage in terms of managementand flexibility to adjust to electricity consumption.As such,it is anessential asset for a decarbonised electricity mix by2050.With this in mind,EDF is building the Hinkley PointC reactors in theUnited Kingdom and completing the Flamanville3 reactor in France.Two EPR reactors are in operation at Taishan in China,in which EDFholds a stake,and one at Olkiluoto in Finland.In France,following the President of the Republics announcementsin February2022 in Belfort regarding the launch of the constructionprogramme for six nuclear reactors in France,EDF,alongside thenuclear industry,is preparing for the implementation of thisambitious and essential programme and conducting studies foreight additional EPR2 reactors.The consultation and dialogue phasewith stakeholders is ongoing.The public debate on the project for aninitial pair of EPR2 reactors at the Penly site in Normandy was heldfrom 27 October 2022 to 27 February 2023.This presented anopportunity to provide information about and discuss this projectand gave rise to a report by the Special Commission for PublicDebate(Commission particulire du dbat public,CPDP)and areview by the Chairwoman of the National Commission for PublicDebate(Commission nationale du dbat public,CNDP),both ofwhich were made public on 26April2023.In December2023,EDFcontacted the CNDP regarding its plan to build a second pair ofEPR2-type nuclear power reactors on the Gravelines site.In itsdecision of 10 January 2024,the CNDP decided that it wasnecessary to organise a public debate.The Group is developing the Nuward project,pioneering the firstSmall Modular Reactor(SMR)in France and aims to startconstruction in 2030.EDF reached an agreement with the British government to continueto develop the Sizewell C nuclear power plant project.The Britishgovernment announced on 22 January 2024 to increase itsinvestment to around 2.5 billion and became the majorityshareholder of the project since the end of 2023,alongside EDF.Atthe same time,a fundraising campaign was launched for the project,aiming to provide additional private capital at the time of the finalinvestment decision(3).EDFs final investment decision remainssubject,in particular,to its ability to raise the necessary financing tocomplete the project and the deconsolidation of the project fromthe Groups balance sheet.EDF is also preparing for site conversions related to the shutdownsof end-of-life power plants.EDF,via Cyclife,continues to developits activities in the decommissioning of nuclear generation assetsand is developing a circular economy through recycling anddismantling.(1)Calculation of emissions avoided by the following products/services,sold by EDF,Dalkia,Luminus,EDF UK and Edison:development of renewable energy in heating networks;energy efficiency;solar power production(installations sold to customers and self-consumption,excluding EDF installations injecting their production into the network);electric mobility;residential heat pumps.This indicator corresponds to the difference between the emissions of the product/service sold and the emissions of a reference scenario set for each product/service.The figures should increase in the coming years,subject to possible changes in methodology in order to remain in line with third-party practices.Regarding the methodology associated with this indicator,see section3.6“Methodology”.(2)No direct emissions and LCA(life cycle analysis)emissions which can be estimated at 4 gCO2/kWh.(3)Sizewell C equity raise process GOV.UK(www.gov.uk);Further steps to prepare Sizewell C for construction GOV.UK(www.gov.uk).1.www.edf.fr18EDF|Universal Registration Document2023The Group,its strategy and activities1.Group strategy and objectivesThe EDF groups aim of achieving very low-carbon productionis also embodied in the accelerated profitable development ofrenewable energies in France and abroad.The EDF group is developing renewable electric energies in alltechnologies(hydropower,solar,onshore wind power,offshore windpower,etc.).They already represent more than a quarter of theGroups total capacity(1).Today,the EDF group is a major player inrenewable energies and aims to continue its development,with theobjective of achieving 100GW of installed gross renewable energycapacity(including hydropower)by 2030.The EDF group is seeking to diversify the different technologies(onshore and offshore wind power,solar power,and hydropower),as well as their geographical distribution.EDF regularly invests inhydropower facilities in order to combine economic,energy andenvironmental performance,and offers solutions to strengthenhydropower generation.Developing networks to meet the challenges of the energy transitionThe role of networks in the energy transition is key.Due to thesustained increase in electricity demand and the growing share ofrenewable energies in the electricity system,network operatorsmust achieve their ambitious targets for developing the connectionsdriven by the Multi-Year Energy Programme(PPE)in France.Networks must adapt to the increasing variability of electricitysystems and therefore be able to absorb massive injections ofintermittent energies(solar,wind),which requires managing thenetworks differently in terms of both injection and withdrawal.Within the EDF group,the distribution network activities in Franceare carried out through Enedis and Strasbourg lectricit Rseaux,two bodies that operate the electricity distribution networkindependently from EDF,and through SEI.Internationally,itssubsidiary EDF International Network exports the Groups know-how and skills in the field of networks.To succeed in the energy transition in their respective regions,thesenetwork operators must transform the networks they operate inorder to(i)achieve the exponential trajectory of connectionsproposed by the PPE to meet the demand of producers(wind farms,solar power plants,solar panels on roofs,stationary storage or theequivalent)and consumers(IRVE Electric vehicule charginginfrastructure,self-consumption);(ii)accelerate their digitaltransition in network operation to strengthen predictivemaintenance and rapid repair;and(iii)renew and strengthenexisting networks to meet growing electricity needs.As the share of electricity in the French energy mix becomesmajority by 2050,the networks must be even more resilient tohazards in order to guarantee access to electricity.In addition,smart meters rolled out by network operators enable electricitymanagers to support their customers in better understanding theirneeds and responding to suppliers requests relating to their actionsto promote greater energy sobriety.In France,Enedis(2)puts at the heart of its concerns the issue ofnetwork reliability and ensures that electricity is 99.9%available inFrance(3).Maintaining this level of availability by 2035/2040 is aconsiderable challenge,both on an industrial and on a human level.Developing flexibility solutions to meet the needs of the electricity systemThe management of the electricity system requires increasedflexibility in order to cope with the variations caused by intermittentenergies over all time horizons.In response to these growing needs for balance,EDF is developing arange of solutions to meet these requirements over different timehorizons.These flexibilities will take multiple forms,both upstream for example,with the continued development of hydropower(lakes and pumped storage hydropower plants),the ability tomodulate future nuclear reactors(EPR),batteries,low-carbonthermal power plants(thanks to bioenergy,and potentially carboncapture and storage)and downstream,with the development ofdemand response or the mobilisation of smart charging of electricvehicles(V1G,V2G).Thus,the Storage plan,launched in 2018,aimsto develop over 10GW of gross storage capacity within the Group by2035.A wholly-owned EDF subsidiary,Agregio Solutions is one of theFrench leaders in the aggregation of decentralised energy resources.To compensate for variability in renewable energy production,Agregio Solutions is developing a range of electrical flexibilityproducts to manage certain types of consumption or to storeelectricity in batteries.In 2026,Agregio Solutions aims to have acontractual portfolio of more than 12GW.By 2035,the Group aims to reach 2GW in decarbonised thermalcapacity in its regions,and to operate at least one combined cyclegas turbine power plant(CCGT)equipped with CO2 capture andstorage(CCS)technology.In France,EDF stands out through its ability to offer 24/7decarbonised electricity and provides its customers with 96carbonised electricity in mainland France.The EDF group invest massively in the energy transitionIn 2023,nearly 95%of the Groups investments are made in line withits carbon neutrality trajectory(94%in 2022)(4).The Group continues to regularly review its asset portfolio toproceed with disposal of non-strategic assets,where appropriateand if conditions are favourable.Considering the reduction in netfinancial debt observed for the fiscal year ended December 31,2023,the Group no longer provides a quantified objective for its disposalplan.(1)33.9GW at the end of 2023 out of a total of 117.3GW in consolidated data.(2)Operator of the electricity distribution network,managed independently of EDF.(3)https:/www.enedis.fr/nouvelle-france-electrique-horizon-2027-et-2032-enedis-publie-le-document-preliminaire-un-futur.(4)See section 6.1,note 20.4 Carbon-free investments of the appendix to the consolidated financial statements for the financial year ended on 31 December 2023 and also see section 3.7.4 European taxonomy.EDF|Universal Registration Document 202319The Group,its strategy and activitiesGroup strategy and objectives1.3.2.1Strategic priorities backed by 5plansThe Groups priorities are backed by the following 5plans and a strategic work programme(1),in line with EDFs raison dtre and businessmodel:Through the Solar Plan,which was launched in 2017,the EDF group aims to become the leader in photovoltaic solar power in France with 30%of new capacity built(2)between 2020 and2035.Through the Storage Plan,launched in2018,the EDF group plans to develop 10GW of new storage facilities worldwide by2035,increasing the Groups storage capacity to 15GW by that time.The EDF group is aiming to develop a portfolio of 1million off-grid kits by 2030.Storage is a key factor in stabilising network frequency,encouraging the inclusion of renewable energies,and managing microgrids in non-interconnected areas.It will be developed by using hydro pumped energy transfer stations and batteries.With the Electric Mobility Plan,launched in October2018,the EDF group aims to be a leader in the supply of electricity for electric vehicles in its four largest European markets(France,the United Kingdom,Italy and Belgium).At the end of2023,nearly 340,000 charging points had been deployed.Lastly,for its own fleet of light vehicles,EDF is rolling out the EV100(3)programme and gradually converting its thermal vehicles to electric vehicles with a target of 100%by2030.2023 was the year of the consolidation of the excell plan launched in spring 2020 to enable the French nuclear industry to restore the most stringent standards and the highest levels of quality and excellence to be at the forefront of major nuclear projects.In the new context of nuclear recovery,the challenge of this plan is to enable nuclear power,a low-carbon energy,to continue to fully play its role in the fight against global warming.In 2023,the 30 commitments of the excell plan were finalised and anchored in operational practices,thanks to the commitment of EDF and all companies in the French nuclear sector(4).See also section1.4.1.1.1“The excell plan”.Through the Hydrogen Plan,launched in April2022(5),EDF aims to secure a leading position in Europe in the generation of100%low-carbon hydrogen,using low-carbon electricity from the grid,nuclear or renewable sources.EDFs ambition is to contribute to the decarbonisation of industry and heavy transport(including the maritime and aviation sectors via e-fuels).1.3.2.2Group transformationSince its creation,the EDF group has consistently overcome thechallenges it has faced.The climate emergency and the need todevelop electricity for the decarbonisation of uses are a new keychallenge for society and the Group.EDF plays a leading role inachieving a carbon neutrality objective by 2050.It must bothimplement a sustainable business model to finance its investments,attract necessary skills for the energy transition and both amplifyand accelerate the transformation of its operating methods.The Group can rely on solid assets:the robust and continuouscommitment of its teams,serving the EDFs raison dtre and thegeneral interest,recognised expertise in all business lines,andshared values of mutual aid and support for employees.Thetransformation initiatives undertaken in recent years have alsogenerated real progress,particularly in terms of empowering teamsand encouraging innovation.To to go faster,and further,the Group is amplifying thetransformation of its operating methods in several areas:collective efficiency to respond to the multiplication andacceleration of projects;cross-functionality between the Businesses to act together onthe electricity system with a uniform vision;increased development of a customer-centric performanceculture to respond to the new business model in which theGroup will operate;adopting the most effective practices and standards to meetthe challenge of recruiting people with key skills.A co-construction process has begun within the Group,aiming todefine the“mindset”that unites the teams to meet the challengesof tomorrow and be the generation that drives the transition.Thismindset is based on three priorities,upon which all teams will becalled to mobilise:EDF is a single team,collaborating enthusiastically in service ofits customers;EDF is reinventing itself,leveraging diversityand learning fromothers;EDF meets the expected results,as it knows how to simplify,prioritise and make decisions at the appropriate level.Without delay,several transformation projects have been launchedas part of the development of a new company project,in line withthis“mindset”.1.Operational excellence projectsFour operational excellence projects were launched in January2023to“build success for EDF”to further the industrial and humanproject.They support and integrate the plans already launched(excell,START 2025,etc.).“Industrialise and accelerate digital technology”project:thisproject aims to propel the Group into a smooth and integratedoperation,creating value,with a common language and tools,andmore accessible and shared data.“Metal time”project:this project aims to enhance operationalperformance,increase the attractiveness of business lines forbetter service to its customers,and to restore the Groups financialleeway to allow it to carry out the necessary investments.“Skills”project:the objective of this project is to meet theconsiderable skills required by the energy transition and the Groupsprojects.(1)The strategic work programme is broken down into around 20 projects,steered at the level of the Executive Committee.(2)Market shares expressed in gross installed capacity.(3)EV100 is a global initiative born in New York during Climate Week NYC in September2017.It aims to bring together major groups committed to the development ofelectric mobility and its generalisation by 2030.(4)See EDFs press release of 15November2022“The excell plan presents its annual results and outlook for the sustainability of its standards”.(5)See EDFs press release of 13April 2022“The EDF group launches a new industrial plan to produce 100%low-carbon hydrogen”.1.www.edf.fr20EDF|Universal Registration Document2023The Group,its strategy and activities1.Description of the Groups activities“Measuring and Managing Operational Performance”project:this project aims to strengthen the management and monitoring ofthe Groups performance by increasing operational efficiency inorder to generate greater cash flow and ensure the Groups financialsustainability.2.Changes in the organisation of the Nuclear business linesThe Group must address unprecedented challenges in nuclearprojects.To meet new requirements and be at the forefront ofinvestment projects in new reactors and the continued operation ofthe existing fleet,the transformation of nuclear activities wouldinvolve organising activities in a more industrial manner,in order to:strengthen and professionalise these business lines by poolingskills;increase and accelerate production rates;support standardisation and operational efficiency objectives;operate in a cross-functional manner for internal and externalcustomers.The project is currently being discussed as part of the Groups socialdialogue process.3.Transformation of the cross-functional sectorsWork has been undertaken with the 5 main sectors supportingbusiness and operations(Human Resources,Communication,DigitalServices,Finance and the General Secretary)by integrating morematrix-based operating principles.1.4Description of the Groups activities1.4.1Electricity generation activitiesAgainst a backdrop in which there will be more electricity usages,the Group has one of the largest power generationfleets in the world,with some of the lowest CO2 emissions,thanks to the share of nuclear and renewable energy in itsenergy mix.The Group aims to continue the development of renewable energies in France and around the world.It isalso preparing for the nuclear generation of the future with the EPR and the development of SMRs(Small ModularReactors).467.6TWh117.3GW37.7GW93%electricity generationworldwide consolidated installed capacitynet renewable capacitylow-carbon production*Direct carbon emissions related to generation,excluding life cycle analysis of means of generation and fuel.The assets of the generation fleetThe Groups generation fleet has significant strengths:a variety of means of generation,which enable adequatecoverage of EDFs downstream portfolio needs(end users,sales to alternative suppliers,sales on the wholesalemarkets,etc.).The use of the different components of theassets is managed by placing the priority at any time on theresources offering the lowest variable costs;a standardised nuclear fleet of 56reactors in France(1)and ninereactors in operation in the United Kingdom;the construction of EPR-type reactors worldwide;the control of the entire life cycle of nuclear generation resources:design,operation,and decommissioning;the implementation of actions aimed at improving the technicalperformance of power plants and extending operating lifespan;a fleet generating at 93%without CO2 emissions(2)due to thepredominance of nuclear and hydropower generation facilities;a geographical position at the junction of electricity exchangesbetween the continental platform and the electric peninsulas(Italy,Spain and the United Kingdom).Composition and specifications of the EDF fleetin mainland FranceWith a total installed capacity of 86.5GW in mainland France(3)at31December2023,the EDF fleet produced 365.9TWh(4)in mainlandFrance in 2023.At 31 December 2023,the capacity of EDFsgeneration fleet was mainly composed of:56 nuclear units operating from pressurised water reactors(PWR).Their power generation capacity ranges from 900MW to1,450MW,with an average age of 38 years.Also seesection1.4.1.1.2“Nuclear power generation in France”;19 thermal units in operation.See section 1.4.1.2“Thermalgeneration in mailand France”;425hydropower plants,with an average age of 78years(5).Seesection1.4.1.3.1“Hydropower generation in France”;other hydropower plants owned by the Groups subsidiaries:S,SHEMA Group,CERGA and RKI(on the Rhine,owned 50%-50%with German energy company EnBW)and the Franco-Swiss entities of Chatelt and mosson.(1)After the permanent shutdown of the two Fessenheim units.(2)Direct carbon emissions related to generation,excluding life cycle analysis of generation plants and fuel.(3)EDF excluding Corsica and French overseas departments.(4)Including pumped storage hydropower.(5)Arithmetic mean.EDF|Universal Registration Document 202321The Group,its strategy and activitiesDescription of the Groups activitiesEDF installed capacity and output in mainland France 20231.4.1.1Nuclear power generation1.4.1.1.1The excell planThe“excell”plan,launched in the spring of2020,aims at enablingthe French nuclear industry to restore to a high standards of rigour,quality and excellence,so as to take on existing and future majorprojects in France,the United Kingdom,and elsewhere in the world.The excell plan also benefits the operating nuclear fleetprogrammes,especially Grand Carnage and related maintenanceoperations.The commitments that were not fully finalised at the end of2022were finalised in2023,which put an end to the deployment ofactions under the excell plan.Committed momentum is now therule for all nuclear players within EDF and the nuclear industry;this continues to bear fruit.Its impact on the results of nuclearprojects is monitored in a quarterly dashboard which ambitioustargets are all levers towards excellence.This dashboard alsomentions the results achieved in the field of skills together withthe annual analysis conducted by the GIFEN(1)as part of theMATCH(2)project and the partnership between EDF and itssuppliers monitored by the nuclear sector barometer maintainedby the GIFEN.All commitments are available at https:/www.edf.fr/plan-excell(3).An overview of the plan is available for 2023.The results obtainedshow progress in each of the five aspects of the plan reflects theresults obtained:Governance in nuclear projectsThe primary milestones for nuclear projects have been identified.For each milestone,three key elements that determine whether themilestone has been achieved have been defined.The monitoringteam in charge of large projects,composed of some high-levelexperts in the various skills,has been set up.It provides a head-upview of the projects progress and can also provide assistance toprojects experiencing issues.At the same time,project managementfor the new EPR2 nuclear reactor programme was put in place(seealso section1.4.1.1.3.2).SkillsThe deployment of the GIFEN MATCH project now provides acomprehensive overview of recruitment and training needs in thevarious industrial sectors,which is updated annually,and abusiness-by-business analysis.This overview,which is based onactivity forecasts of nuclear operators and data regarding theresources available to manufacturers in this sector,enables todetermine actions to be rolled out in terms of attractiveness,training and recruitment.The Universit des Mtiers du Nuclaire,founded in early 2021,oversees all actions intended to meet these needs in skilled,trainedand experienced personnel.Bringing together national and regionalplayers in this field,the Universit des Mtiers du Nuclaire is thereal driver for skills improvement in the sector.Manufacturing and assemblyAmong the numerous actions that have been carried out,twomajor changes should be noted:a new strategy to monitor the manufacturing of products,so asto achieve convergence between,on the one hand,the smoothoperation of the manufacturing cycle and,on the other hand,quality issues and associated regulatory requirements;a common practice in other industries:the development ofqualifications for industrial processes,so as to re-secureproduct quality and reduce the need for monitoring.Lastly,EDF decided to embark on ISO19443 certification for its ownentities concerned by nuclear safety issues,and for companiescarrying out manufacturing or other activities involving such issues.120 companies in the sector are ISO19443 certified,with a further80 companies in the process of obtaining certification.Supplier relationshipsThe quality of the relationships between EDF and its suppliers iscentral to the success of work on the operating fleet and for newprojects.In consultation with companies in the sector,thecontractual provisions have been reviewed based on a strategyfocused on shared success in future projects.An annualbarometer gathers suppliers perception data and makes itpossible to assess progress and identify areas in whichimprovement is still necessary.The“suppliers platform”nowmakes it possible to have a cross-functional view of industrialissues and to develop a strategy that aims to streamline thesuppliers panel and implement end-to-end performancemanagement for the main suppliers.Regular performancereviews and a supplier development approach to supportmanufacturers in their progress towards excellence are the mainlevers.(1)GIFEN:French Nuclear Energy Industry Group.(2)MATCH:project led by GIFEN for maintaining the load-resource balance within the nuclear sector.(3)See also section3.4.3.2.1“The excell plan:being present in major nuclear power projects”.1.www.edf.fr22EDF|Universal Registration Document202386,467MW 365.9TWhNuclear61,370MWWind6MWNuclear320.4TWh87.6q%Wind0.001TWhHydropower(1)20,146MW23%Thermal(2)4,945MW6%Hydropower(1)(2)38.7TWh10.6%Thermal(3)6.7TWh1.8%Expressed in megawatts of maximum capacity linked to the network.(1)Excluding Corsica and overseas departments,i.e.439MW in 2023,including sea energy:240MW.(2)Excluding Corsica and overseas departments,i.e.1,310MW in 2023.(1)Excluding Corsica and overseas departments,i.e.1.4TWh in 2023.(2)Generation including pumped storage consumption.(3)Excluding Corsica and overseas departments,i.e.4.9TWh in 2023.NB:figures are rounded.Installed capacityElectricity outputThe Group,its strategy and activities1.Description of the Groups activitiesStandardisationStandardisation and replication are key words in the context ofEDFs nuclear engineering ambitions today.The technicalguidelines have been simplified and digitised so they can bedirectly integrated into the design tools.This continues today bymaking sure technical requirements are strictly based on needs.Mandatory use catalogues(catalogues dusage obligatoire,definedas CADO)have been established to alleviate the heterogeneity ofboth equipment and suppliers.This major change increases thesize of the series to be manufactured and promotes investmentin process automation and skills,guaranteeing continuous qualityimprovement.Replication ensures both the use of tried andtested equipment and the reduction of risks.In the field of welding,the Haute cole de formation soudage,arecently created welding school based in Cherbourg(Hefas),keepsgrowing and will achieve its definitive structure in the first half of2024.Accreditation of welders and the improved quality of controlsand the planning of welding works were developed jointly by EDFand its industry contractors with a view to“welding right the firsttime”.These practices have shown their effectiveness in“stress-corrosion cracking”correcting operations.1.4.1.1.2Nuclear power generation inFranceThe electricity generated by EDF in France from its fleet of nuclearpower plants represented 87.6%of its total electricity generationin2023(1).1.4.1.1.2.1EDFs nuclear fleet in France and its operationEDFs PWR fleet in operation is divided into three series of availablepower generation capacity.The French nuclear fleet consists of56 units in operation,located on 18 sites(2)owned by EDF.Itrepresented a total authorised power of 61,370MW at 31December2023.With an average age of around 38years old,it is within theaverage range of nuclear fleets installed worldwide.SeriesNumberof unitsin operationTotal capacityAverage age900MW3229,010MW411,300MW2026,370MW35N4 1,450MW45,990MW23TOTAL5661,370MW38(1)Including pumped storage hydropower.(2)After the permanent shutdown in2020 of the two 900MW Fessenheim units.EDF|Universal Registration Document 202323CattenomChoozPenlyNogent-sur-SeineBelleville-sur-LoireGolfechSaint-AlbanPaluelCivauxFlamanvilleChinonBlayaisTricastinCruasBugeySaint-LaurentDampierreGravelines900MW1,300MW1,450MWEPRThe Group,its strategy and activitiesDescription of the Groups activitiesThe commissioning and most recent 10-year inspection(VD)dates for these units as of end-2023 are as follows:UnitsYear ofindustrialcommissioningMost recent10-yearinspectionNext10-yearinspectionUnitsYear ofindustrialcommissioningMost recent10-yearinspectionNext10-yearinspectionBugey219792021VD5Gravelines619852018VD4Bugey319792013VD4 in progressCruas419852016VD4Bugey419792021VD5ChinonB319872020VD4Bugey519802021VD5ChinonB419882020VD4Dampierre119802021VD5Paluel119852016VD4Gravelines119802021VD5Paluel219852018VD4Gravelines219802013VD4 in progressPaluel319862017VD4Tricastin119802019VD5Paluel419862019VD4Tricastin219802021VD5Saint-Alban119862017VD4Dampierre219812022VD5Flamanville119862018VD4Dampierre319812013VD4 in progressSaint-Alban219872018VD4Dampierre419812014VD4Flamanville219872020VD4Tricastin319812022VD5Cattenom119872016VD4Tricastin419812014VD4Cattenom219882018VD4Gravelines319812022VD5Nogent119882019VD4Gravelines419812014VD4Belleville119882021VD4Blayais119812022VD5Belleville219892019VD4Blayais219832013VD4 in progressNogent219892020VD4Blayais319832015VD4Penly119902021VD4Blayais419832015VD4Cattenom319912021VD4Saint-Laurent119832015VD4Golfech119912012VD3 in progressSaint-Laurent219832023VD5Cattenom419922013VD3ChinonB119842013VD4 in progressPenly219922014VD3Cruas119842015VD4Golfech219942014VD3ChinonB219842016VD4ChoozB120002020VD3Cruas219842018VD4ChoozB220002019VD3Cruas319842014VD4Civaux120022021VD3Gravelines519852017VD4Civaux220022022VD3At end-2023:in the 900MW series,12 reactors out of 32 completed theirfourth 10-year inspections(including Blayais 1 and Saint-Laurent B2 in 2023).Five VD4s are under construction(Blayais2,Bugey 3,Chinon B1,Dampierre 3,Gravelines 2);in the 1,300MWseries,16 reactors out of 20 completed theirthird 10-year inspection(including Penly 1 in 2023).One VD3is under construction(Golfech 1);in series N4,the four reactors have completed their second10-year inspections(including Civaux 1 and Civaux 2 in 2023).Regulatory noticeRegulations applicable to Basic nuclear installation(BNI)After completion of a procedure set out in the French Environmental Code,the construction of a basic nuclear installation(Installation nuclaire de base,INB)is authorised by a decree issued by the French Prime Minister after consulting the FrenchNuclear Safety Authority(Autorit de sret nuclaire,ASN)and on the basis of a report produced by the French Minister forNuclear Safety.The authorisation to commission a BNI is issued by the ASN,also on completion of a procedure set out in theFrench Environmental Code.The general regulations applicable to basic nuclear installations give priority to the protection ofpublic safety,health and sanitation and the protection of nature and the environment(known as“protected interests”).Law No.2023-491 of 22June2023 amended certain provisions of the French Environmental Code in order to accelerate proceduresrelated to the construction of new nuclear installations near existing nuclear sites and the operation of existing facilities.In a letter dated 26 March 2024,the ASN reminded EDF of its expectations regarding the prevention and detection ofcounterfeiting,falsification,and fraud in the factories manufacturing equipment for nuclear power plants.This letter follows thehearing of EDFs CEO by the ASN board on 26 February 2024,and the submission by EDF on 19 March 2024,of a detailed actionplan considered as an appropriate initial step(1).(1)https:/www.asn.fr/l-asn-informe/actualites/contrefacons-falsifications-et-suspicions-de-fraude-l-asn-rappelle-ses-exigences-a-edf1.www.edf.fr24EDF|Universal Registration Document2023The Group,its strategy and activities1.Description of the Groups activitiesGeneration allocation contractsIn the 1970-80s,EDF developed an industrial cooperation withEuropean operators in the nuclear field,in the form of generationallocation contracts backed by units of the EDF French nuclearfleet.The principle of generation allocation contracts involves assigning ashare of the capacity of the units in question to co-contractingparties in exchange for payment of the same share of the unitsoverheads(construction costs,annual operating costs,decommissioning costs,local and specific nuclear taxes,etc.);theseparties are sold the same share of the power generated by theseunits at the variable cost of the fuel(including upstream anddownstream fuel costs)throughout their lifetime.As at 31December2023,EDF has within its fleet 10nuclear unitsparticipating in the contracts(up to 1GW)with the followingEuropean energy companies:Cattenom1-2:EnBW(5%);Bugey2-3:lectricit de Laufenbourg(1)(17.5%);Tricastin1 to 4:Electrabel(2)(12.5%);ChoozB1-B2:Luminus,EDF subsidiary in Belgium(3.3%).EDF has also entered into a second type of generation allocationcontract for a fleet of power plants(totalling some 2GW).While thecontract term and the contribution to overheads remain linked toclearly identified units within the fleet,the total amount of powersold at the variable cost of the fuel is determined by the availabilityof a broader baseline fleet of power plants,applied to the share ofcapacity assigned to the co-contracting parties for the units inquestion.These contracts mainly concern the following powerplants:ChoozB1-B2(initial series unit N4):Electrabel(21.7%);Cattenom3-4:lectricit de Laufenbourg(7.8%)and the Swisselectricity group CNP(21.8%).In these two types of contracts,the contracting parties advised EDFof the industrial risks during the development of the fleet.Theyaccept the risks relating to the current operation of the powerplants.On the other hand,they have no operational role.Operation of the nuclear fleetNuclear energy is a means of production with a low variable cost,which is primarily related to fuel.It represents less than 30%ofoperating costs(3).The main competitive levers of the nuclear fleet inits operating phase are thus the amount of generated energy andthe optimisation of fixed operating and maintenance costs.Thelevers relating to the fuel cycle are described in section1.4.1.1.2.3.Generation cycle and planned outagesEDF must reconcile the challenges linked to the strong variations inseasonal consumption in France,due to its strong temperaturesensitivity,and the availability of maintenance resources togetherwith an efficient use of reactor fuel.Therefore,EDF has adopted12and18 month generation cycles for its fleet,which broke down asfollows at end-2023:SeriesNumber of unitsGenerationcycle time900MW28Approx.12months900MW41,300MW20Approx.18 months1,450MW(N4)4Reactor shutdowns occur at the end of these production cycles,making it possible to replace a fraction of the fuel loaded in the coreand to perform maintenance work.Two types of planned outagesare alternated at the end of each generation cycle:shutdown for simple refilling(ASR)for a standard duration ofapproximately 40days.The main operation performed is theunloading of the spent fuel and the reloading of the new fuel.Some maintenance operations or periodic testing may also takeplace during this type of outage;the partial inspection(VP),with a normative duration(4)ofaround 85days,dedicated to refuelling and maintenance.The power plant is shut down every 10 years for a 10-yearinspection(5)(VD).This lasts around 180 days(6)on average.Itsduration varies according to the works and maintenanceprogramme,as well as the series concerned.The programme for a 10-year inspection includes the following:unloading of spent fuel and reloading of fresh fuel,as at eachoutage;hydropower test of the primary circuit,a leak test of thecontainment,and inspection work of the reactors pressurevessel;modification work,associated with 10-year safety periodicreview;other specific maintenance operations,in particular renovationor replacement of major components.At the end of each 10-year inspection,it is up to ASN to give itsapproval to restart the reactor for the next cycle and to adopt aposition on continued operation for another 10 years,at which timeit may also issue technical recommendations.Regulatory noticeNuclear safety authorityThe French Nuclear Safety Authority(Autorit de sretnuclaire,ASN)is an independent administrative authoritywhich contributes to the control of nuclear safety,radiationprotection in France,and informing the public about thesematters.Its activity is organised around the following missions:contributing to drawing up legislation,by issuing its opinionto the French government on draft decrees and ministerialorders,and making regulatory rulings of a technical nature;examining all individual authorisation applications for Basicnuclear installations-BNI-(Installations nuclaires de base).Itgrants authorisations except for major BNI authorisations,suchas for construction and decommissioning;inspecting installations,which it carries out throughregulatory scheduled and unannounced on-siteinspections,in particular during regular compliance checks.These are mandatory for a power plant to continueoperating;informing the public about the status of nuclear safety andradiation protection in France;in the event of an emergency,the ASN oversees theoperations to secure the installation carried out by theoperator.It informs the public of the situation and assiststhe Government.In particular,it provides the competentauthorities with recommendations on the measures to betaken in respect of civil security.(1)Axpo Group.(2)Engie Group.(3)Operational costs are defined as follows:fuel costs(including downstream expenses in the fuel cycle),operating expenses(purchases and external services,employee expenses)and maintenance costs(expenses and investments).They do not include investments related to construction or decommissioning expenses.(4)Standard durations represent optimised and realistic benchmark durations by outage types.They take into account the feedback from past.The planned duration of shutdowns varies around these reference periods depending on the work programme to be carried out.(5)Pursuant to Article593-18 of the French Environment Code.(6)“Normal”duration excluding special and/or extreme cases.EDF|Universal Registration Document 202325The Group,its strategy and activitiesDescription of the Groups activitiesOperation of EDFs nuclear fleetOwing to their low variable cost,nuclear generation facilities areprimarily used as base-load generation.They are used just afterrun-of-river hydropower and other intermittent renewable energies,as well as energy purchased under purchase obligations fromdecentralised electricity producers.Variations in energyconsumption over one year(summer-winter,day-night)and thecurrently restricted fluidity of wholesale markets due to limitedinterconnections on the borders lead nuclear energy to be used alsofor mid-merit generation.High variations in seasonal consumptionin France and its major variation during winter months require thatplanned nuclear fleet outages be concentrated between April andOctober.Generation in2023Nuclear generation reached 320.4TWh in 2023,up 41.4TWhfrom2022(279.0TWh).This increase is due to better availability ofthe nuclear fleet,mainly due to better control of the treatment ofphenomenom of stress corrosion,as well as an improvement in thecontrol of shutdowns for maintenance.Following the discovery ofstress corrosion phenomenom at the end of 2021,severalunexpected shutdowns and extended shutdowns for maintenancewere necessary in 2022 to understand the issue and implement atreatment strategy.In 2023,stress corrosion treatment entered anindustrial dimension:the improvement of control processes,as wellas feedback from repair work,made it possible to optimiseschedules and reduce reactor downtime.It should be noted that the impact of a nationwide social movementagainst the pension reform in March and April 2023 delayed reactormaintenance and restart operations.2023technical performanceDespite the progress made,stress corrosion cracking continues toimpact nuclear generation in 2023,although this has decreasedfrom 2022,largely due to the industrialisation of the work.Among the completed shutdowns,the following were on scheduleor shorter than forecast:Nogent 2(VP),Cattenom 2(VP),Cattenom 1(intermediateshutdown),Belleville 2(intermediate shutdown)and Golfech 2(ASR).Shutdowns for series 1,300 P4,which included thepreventive replacement of RIS cold branch lines as part of thestress corrosion treatment strategy and benefited from siteoptimisations resulting from feedback;Blayais 3(ASR),Tricastin 2(VP),Tricastin 1(VP),not concernedby the stress corrosion file.Notable in particular was the performance of Tricastin 1,VP pilotpower plant for Lot B post-VD4 operations,completed 29 daysahead of its estimated duration.Launched in 2021,the START 2025 transformation programmefocused on regaining industrial control of unit shutdowns,continuesto bear fruit:the extension of unit shutdowns was reduced by anaverage of 13.7days compared to 2022.In particular,this involvescontrolling reactor shutdown and restart operations.For example,while the reactor unloading operation began on schedule for only2%of outages in2021,compliance with the schedule increased to40%in 2022 and to 64%in 2023.Among the reactors that experienced significant overruns of theirprojected duration(50 days)are primarily the first reactors thatwere affected by stress corrosion:Civaux 1(VD),Civaux 2(VD),Chooz 1(VP),Chooz 2(VP),Cattenom 1(VP),Flamanville(ASR-RGV),Golfech 1(VD),Penly 1(VP)and Penly 2(VP).Facilities not contendingwith the stress corrosion issue:Blayais 1(VD),Cruas 1(VP),Gravelines 1(VP)and Saint-Alban 1(VP).These are shutdowns atsites with a particularly large industrial programme(Gravelines,Cruas)or that were impacted by major technical hazards and thesocial movement at the beginning of the year(Blayais,Cruas,Saint-Alban).Nuclear generation expressed in annual energy is based on ageneration rate for the French nuclear fleet as a whole.This isdefined as the ratio of energy generated to the maximum theoreticalenergy(the energy generated if the installed capacity wereoperated year-round).This is also known as the load factor(“Kp”).This rate is obtained by multiplying two coefficients(Kp=KdKu):the availability factor(“Kd”)(available energy(1)in comparison tomaximum theoretical energy.The latter concept correspondsto year-round operation of the installed capacity).The Kddepends on outage durations,and is therefore impacted bystandard durations and the work programme to be performed;the utilisation factor,(“Ku”)(energy generated compared toenergy available).The Ku factor reflects environmental,regulatory and social constraints,supply of system services andoptimisation carried out by EDF(fuel and modulation).In 2023,the Kp factor reached 59.6%,up 7.7%from 2022(51.9%).This results from a Kd of67.3%,up 9.2%from 2022(58.1%)and a Kuof 88.6%,down 0.7%from 2022(89.6%).Handling of stress corrosion detected on the auxiliary circuits ofa number of nuclear reactorsUpon performing the scheduled controls during the 10-yearinspection of the Civaux 1 reactor in late 2021,stress corrosioncracking was identified on parts of the pipework in the reactorsmain primary circuits auxiliary circuits.EDF immediately carried outinspections and expert appraisals of the four series of reactorsmaking up the French nuclear fleet(900MW,1,300MW-P4,1,300MW-P4and N4).The examinations performed in 2022 made it possible to define aninitial characterisation of the stress corrosion sensitivity of the56 reactors in the nuclear fleet:40 reactors were identified ashaving little or no sensitivity to stress corrosion.These included32 reactors from the 900MW series and 8 reactors from the1,300MW-P4 series.16reactors were identified as being vulnerableor highly vulnerable to the phenomenon of stress corrosion:the 121,300MW-P4 series reactors and the 4 N4 series reactors.By theend of 2023,the preventive replacement of pipe sections had beencompleted for 15 of the reactors sensitive to stress corrosioncracking.The industrial programme for the preventive replacementof pipe sections planned for reactors sensitive to stress corrosionwill be completed in the first quarter of 2024.In 2023,more than 350 non-destructive tests were scheduled toconfirm the reactors sensitivity diagnosis,and to characterise a riskinherent to the welds that were repaired during the initialassembly(2)regardless of the reactors sensitivity.The plannedchecks were carried out in full and confirmed the reactorssensitivity classification and the specific risk related to the repairedwelds.The checks carried out on these units identified a few casesof suspected stress corrosion,which led to around 10additionalreplacement projects in 2023.In 2024,the reactor inspection programme will continue with ahigher volume of checks than in 2023.As in 2023,this could involvea decision to perform some additional repairs.The inspections willbe carried out during scheduled maintenance shutdowns;noadditional or dedicated shutdowns are planned.By the end of 2025,most of the auxiliary lines inspection programme will have beencompleted,in accordance with initial forecasts.It will have beensupplemented by checks on other lines(pressuriser expansion lines,main primary circuit,small-diameter lines).The risks relating to the phenomenon of stress corrosion aredescribed in section2.2.1 under risk 1B“Failure to comply with theobjectives in terms of operation and/or of extending the operatinglife of nuclear power plants(France and United Kingdom)”.(1)Available energy is equal to the maximum theoretical energy less generation losses due to technical reasons inherent to power plants,such as planned outages,unplanned outages due to failure or safety requirements,and performance of regulatory tests.(2)See EDF prospectus of 17March 2023“Stress Corrosion”.1.www.edf.fr26EDF|Universal Registration Document2023The Group,its strategy and activities1.Description of the Groups activitiesIrradiation department in support of the CEAAt the request of the French State,EDF is studying the creation ofan irradiation department involving the two reactors at the Civauxnuclear power plant in support of the CEA(Commissariat lnergieatomique-Atomic Energy Commission),which wants to haveredundant means to support its activities(1).1.4.1.1.2.2Environment,nuclear safety,radiation protectionThe risks related to the environment,nuclear safety and radiationprotection are described in section2.2.2 under risk 2C“Nuclearsafety violations during operations resulting in nuclear civil liability”.Environmental protectionEDFs environmental process was launched on a few sites in2002.Itwas then extended to all nuclear generation units.It is based on anISO14001-certified environmental management system(EMS).Seesection 3.5.4.2“Environmental management system”.For adescription of radioactive waste processing downstream of the fuelcycle as well as decommissioning,see section1.4.1.1.2.3.A constant nuclear safety procedureEDF,in its capacity as a nuclear operator,takes responsibility fornuclear safety and,in a rapidly-changing context(marketcompetition,environmental issues,European connection,etc.),EDFreaffirms as its absolute priority the protection of the human andenvironmental health,among other things,through the preventionof accidents and the limiting of their consequences as regardsnuclear safety.The implementation of the French nuclear powerprogramme led EDF to establish a safety procedure that:takes into account,from the design stage,the risks that mightarise during the operation of the power plants,whether relatingto the actual operation of the facilities or to internal orexternal attacks;is based both on the application of strict rules of operation,andon the cautious and inquiring attitude of the technical teamsthanks to the establishment of a true safety culture;is based on the cumulative experience of a standardised fleet;incorporates and promotes a continuous improvementapproach.In particular,it is embodied by the constant missionto reduce the number of automatic reactor trips;benefits from integrated nuclear engineering and R&D withinthe Group in order to anticipate the occurrence of failures,maintain the facilities in good working order,developequipment on an ongoing basis,reassess safety margins andmonitor technology advances,as well as the implementation ofmore effective new technologies and the management of sitesbeing decommissioned;relies strongly on the development of skills.With this objectivein mind,each nuclear generation site is equipped with asimulator used for training to cope with any type of situation.Regulatory noticeNuclear transparencyArticlesL.125-10 et seq.of the French Environment Code includes specific provisions on the right to information regarding thenuclear industry aimed at guaranteeing the publics right to reliable,accessible information.In particular,the operator of a Basicnuclear installation(BNI)is required to declare any accidents an
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2023 Annual ReportUNITED STATES SECURITIES AND EXCHANGE COMMISSIONWashington,D.C.20549_Form 10-K(Mar.
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Annual Report 2023 Food 59verage 41%Net RevenueMix of Net RevenueCore Division Operating Profit 1Frito-Lay North America 27%Quaker Foods North America 3%PepsiCo Beverages North America 30%Latin America 13%Europe 15rica,Middle East and South Asia 7%Asia Pacific,Australia and New Zealand and China Region 5%Frito-Lay North America 42%Quaker Foods North America 4%PepsiCo Beverages North America 18%Latin America 14%Europe 12rica,Middle East and South Asia 5%Asia Pacific,Australia and New Zealand and China Region 5%30%7%5B%4%5%5YAWC%U.S.57%Outside U.S.43 23 FINANCIAL HIGHLIGHTS1.Excludes the mark-to-market net impact of our commodity derivatives,restructuring and impairment charges,acquisition and divestiture-related charges,as well as impairment and other charges.In 2023,also excludes product returns,inventory write-offs and customer and consumer-related costs associated with the voluntary recall of certain bars and cereals in our Quaker Foods North America division(Quaker Recall).In 2022,also excludes the gain associated with the sale of Tropicana,Naked and other select juice brands(Juice Transaction).See page 133“Reconciliation of GAAP and Non-GAAP Information”for a reconciliation to the most directly comparable financial measure in accordance with U.S.Generally Accepted Accounting Principles(GAAP).On a reported basis,the division operating profit percentages in 2023 were:Frito-Lay North America 47%,Quaker Foods North America 3%,PepsiCo Beverages North America 18%,Latin America 16%,Europe 5%,Africa,Middle East and South Asia 6%and Asia Pacific,Australia and New Zealand and China Region 5%.2023 and 2022 reported operating profit was$11,986 and$11,512,respectively,reflecting an increase of 4%in 2023.2.Percentage changes are based on unrounded amounts.3.Excludes the mark-to-market net impact of our commodity derivatives,restructuring and impairment charges,acquisition and divestiture-related charges,impairment and other charges,as well as pension and retiree medical-related impact.In 2023,also excludes product returns,inventory write-offs and customer and consumer-related costs associated with the Quaker Recall.In 2022,also excludes the gain associated with the Juice Transaction,tax benefit related to the Internal Revenue Service(IRS)audit and tax expense related to the Tax Cuts and Jobs Act(TCJ Act).See page 133“Reconciliation of GAAP and Non-GAAP Information”for a reconciliation to the most directly comparable financial measure in accordance with GAAP.4.Includes the impact of net capital spending.See page 133“Reconciliation of GAAP and Non-GAAP Information”for a reconciliation to the most directly comparable financial measure in accordance with GAAP.2023 and 2022 net cash provided by operating activities was$13,442 and$10,811,respectively,reflecting an increase of 24%in 2023.PepsiCo,Inc.&Consolidated Subsidiaries(in millions,except per share data;all per share amounts assume dilution)Summary of Operations20232022%Change 2Net revenue$91,471$86,392 6%Core operating profit 1$13,875$12,32513%Reported earnings per share$6.56$6.42 2%Core earnings per share 3$7.62$6.79 12%Free cash flow 4$8,122$5,855 39pital spending$5,518$5,207 6%Common share repurchases$1,000$1,500-33%Dividends paid$6,682$6,172 8%pep highlightsClimateIn 2023,we continued to work toward our goal of 100%renewable electricity in our direct operations,and approximately 80%of the electricity we used globally was from renewable sources.4WaterIn 2023,we achieved our goal of 25%improvement in operational water-use efficiency in high water-risk areas vs.2015 baseline,two years ahead of schedule.5PackagingIn 2023,31 markets had at least one PepsiCo product with 100%recycled PET(rPET)in its packaging,including India,where Pepsi Black was the first carbonated beverage to market with a 100%rPET bottle after the countrys decision to permit its use in food and beverage applications.PeopleAs of 2023,women hold 45%of our global manager roles and continue to be paid within 1%of men.6We also increased our Black and Hispanic managerial populations in the U.S.to 9.2%and10.3%,respectively.7POSITIVE VALUE CHAINWe are helping to build a circular and inclusive value chain.POSITIVE AGRICULTUREWe are working to source our crops and ingredients in ways that help restore the earth and strengthen farming communities.Sustainably Sourced Ingredients100%of our grower-sourced crops(potatoes,whole corn,and oats)are sustainably sourced in 27 countries,and more than 90%of these crops are sustainably sourced globally as of2023.1Regenerative AgriculturePepsiCo and Walmart announced a 7-year collaboration to pursue up to$120 million worth of investments to help improve soil and water health across U.S.and Canadian farmland helping to lower carbon emissions while supporting the pep goal of spreading the adoption of regenerative agriculture practices across 7 million acres by 2030.POSITIVE CHOICESWe are inspiring people through our brands to make choices that create more smiles for them and the planet.Expanded Portfolio OfferingsWe are more than 83%of the way toward our 2025 targets in reducing added sugars,sodium,and saturated fat across our beverage and convenient foods portfolio.2In 2023,we introduced two new nutrition goals:By 2030,we aim for at least 75%of our global convenient foods portfolio volume to meet or be below recommended category sodiumtargets.3 By 2030,we aim to deliver 145 billion portions of diverse ingredients annually in our global convenient foods portfolio.Each portion will provide approximately 10%of the suggested daily amount of the relevant ingredient.pep (PepsiCo Positive)is our roadmap for how we operate within planetary boundaries and promote positive change for the planet and people.Guided by pep ,were transforming how we grow our ingredients,how we make,move,and sell our iconic portfolio of products,and how we inspire people through our brands.By becoming better,we can help transform the global food system and build a stronger,more sustainable future for all.Please see our website()under Our Impact and the following notes for additional information regarding our pep goals and progress highlights in this Annual Report.Unless otherwise noted,goals and progress reflect the impact of our acquisitions of Hangzhou Haomusi Food Co.,Ltd.(Be&Cheery),BFY Brands,Inc.,Pioneer Food Group Ltd.(Pioneer Foods),and SodaStream International Ltd.and our divestiture of Tropicana,Naked and other select juice brands.Organizational changes(e.g.,acquisitions,mergers,and divestitures)are evaluated to determine if they have a significant impact on our sustainability performance and,as data becomes available,all reported years for metrics impacted by an organizational change are recast to consistently reflect the impact of the organizational change.1.For grower-sourced crops,sustainable sourcing refers to meeting the independently verified environmental,social,and economic principles of PepsiCos Sustainable Farming Program(SFP).For more information on PepsiCos SFP and the applicable standards,please see https:/ on 2022 data in our Top 26 Beverage markets,which represent 78%of our global beverages volume,and our Top 23 Convenient Foods markets,which represent 86%of our global convenient foods volume.Results reflect exclusion of Be&Cheery portfolio.3.These targets have been set across 30 product categories ranging from hot cereals to potato and vegetable chips to tortilla chips and are approximately 15 30%lower than our current target of 1.3mg/kcal.4.The goal is being accomplished using a diversified portfolio of solutions,including renewable energy certificates.5.High water-risk locations defined by World Resources Institutes Aqueduct tool.Results reflect the exclusion of third-party facilities.Between 2006 2015,water-use efficiency improved by 26%in global legacy operations at the date of target setting.6.Based on pay equity program implemented in 71 countries that collectively make up more than 99%of our salaried employee population,after controlling for legitimate drivers of pay such as job level,geographic location,and performance ratings;based on base compensation.7.To reflect workforce availability of the communities where we operate.I am pleased to inform you that 2023 was another good year for PepsiCo.We exceeded many of our performance goals,innovated across our portfolio,and continued to transform the business and build new capabilities.We did this while continuing to invest in communities where we live and work,create industry-leading partnerships,and nurture our talent and workplace culture.More than ever,we put PepsiCo Positive(pep )at the center of all that we do,transforming the business from end-to-end to drive sustainable performance and value that positively impacts the planet and our communities.Our 2023 results show that our Winning with pep strategy is working,and it is the key to building an even Faster,Stronger,and Better PepsiCo.Becoming Even Faster,Stronger,and BetterOur financial performance in 2023 was highlighted by robust 9.5%organic revenue growth,bringing our three-year compound annual organic revenue growth rate to 11%,and 14%growth in core constant currency earnings per share(EPS).We showed very good progress across geographies,with organic revenue up 8%in North America,12%in our International business,10%in our Global Convenient Foods business,and 8%in our Global Beverages business.1 Our results reflect more than$1 billion in productivity savings,while minimizing waste across our value chain.From a marketplace perspective,in 2023 we held or gained share in more than half our key global beverage and convenient foods markets.We also received the top spot for manufacturing in the Kantar PoweRanking survey for the eighth consecutive year,a testament to the collaborative relationships we maintain with our customers and partners.This strong performance enabled us to increase our annualized dividend by 7%,effective with the dividend expected to be paid in June 2024.This will represent PepsiCos 52nd consecutive annualized dividend per shareincrease.Our success in 2023 was powered by the critical investments were making to accelerate growth and build a company that thrives in the future,such as:Advancing major transformation initiatives to increase our productivity,elevate our focus on cost control,and speed up the implementation of our digital strategy;Showing progress with the automation of our data and digital infrastructure and expanding critical digital programs in more markets to enable faster decision making;Launching our Powering Positive Growth marketing transformation,leveraging the scale and influence of our global brands;Driving scope and presence in key consumer channels,like Away from Home and e-commerce;andTO OUR SHAREHOLDERS,1.2023 reported net revenue increased 5.9%.Three-year compound annual reported net revenue growth was 9%.2023 reported EPS increased 2%.2023 North America,International,Global Convenient Foods and Global Beverages reported net revenue increased 6%,6%,7%and 4%,respectively.Organic revenue growth and core constant currency EPS growth are non-GAAP financial measures.See page 133“Reconciliation of GAAP and Non-GAAP Information”for definitions and more information about these results,including a reconciliation to the most directly comparable financial measure in accordance with GAAP.PepsiCo Annual Report 2023 1 Laying the groundwork for the future of the business and our industry,becoming the first consumer packaged goods company to collaborate with the Stanford Institute for Human-Centered Artificial Intelligence to shape responsible and ethical AI standards around consumer goods and retail.Were also continuing to transform our portfolio with new innovations and more positive choices for consumers.These include:Launching Starry,our new lemon-lime soda,as well as mini-snacks canisters and new Beyond the Bottle solutions with Gatorade;Introducing our new Pepsi visual identity;Refreshing and extending our lineup of bold flavor profiles across large brands with Flamin Hot andDoritos;Reducing sodium in some of our biggest brands like Lays Classic,Doritos Nacho Cheese,and Cheetos Crunchy in the U.S.;Sabritas Adobadas in Mexico;and Walkers in the U.K.;and Reducing added sugars and expanding our zerosugar offerings across our beverage portfolio,with Pepsi Zero Sugar now available in 121 internationalmarkets.People and Planet at the Center As we work to grow our business and deliver best-in-class performance,we continue to make sure we are a company that has a positive impact beyond our financials.In 2023,pep remained our North Star,and we made progress across its three core pillars:Positive Agriculture,Positive Value Chain,and Positive Choices.Positive Agriculture:Forging industry-leading partnerships to advance our goal of adopting regenerative agriculture practices across seven million acres worldwide,roughly the size of our agricultural footprint.This includes a collaboration with Walmart to cover more than twomillion acres of farmland in the U.S.and Canada,as well as strategic partnerships with three of the most well-respected U.S.farmer-facing organizations Practical Farmers of Iowa,the Soil and Water Outcomes Fund,and the Illinois Corn Growers Association;and Announcing the third year of our Positive Agriculture Outcomes Accelerator with investments in projects across nine countries that support farmer livelihoods,help scale sustainable innovations,and accelerate the spread of regenerative agriculture.Positive Value Chain:Introducing more sustainable packaging solutions,with 31 markets having at least one product packaged with 100%rPET;Continuing to scale new business models that require little or no single-use packaging,allowing users to personalize their choices in reusable containers at home or on the go through SodaStream and expanding Beyond the Bottle at Gatorade and Propel with enhancers,tablets,andpowders;Opening an industry-leading Greenhouse Learning Center for the Frito-Lay and Quaker Research and Development teams to study compostable packaging,aimed at speeding up the rate of innovation for packaging solutions;Launching pep Partners for Tomorrow to help our partners achieve their own sustainability goals,bringing PepsiCos comprehensive customer sustainability offerings under a single umbrella;Advancing our Diversity,Equity,and Inclusion agenda around our people to reflect the communities where we operate,including reaching 45%women in management roles globally,while increasing U.S.Black and Hispanic representation at the manager level to 9.2%and 10.3%,respectively.We also continued to strengthen our ability to hire,develop,and retain the best and brightest talent,supporting our business partners,while helping to build an inclusive supply chain and create economic opportunity in the communities weserve;Continuing to focus on investing in our employees both frontline and professional and providing more opportunities for career advancement;and Creating smiles in our communities through the PepsiCo Foundation,investing$47.4 million in more than 40 countries to help unlock access to nutritious food,safe water,and economic opportunity.2 PepsiCo Annual Report 2023 Positive Choices:Continuing to transform our portfolio with new goals to further reduce sodium and deliver 145 billion portions of diverse ingredients such as legumes,whole grains,plant-based proteins,fruits,vegetables,and nuts and seeds annually by 2030;and Expanding the variety of positive choice offerings with our air popped,baked,reduced fat,lightly salted,and Simply branded products,as well as smaller packsizes.Performing to Our PotentialFrom our investments in long-term growth to our actions to build a more resilient and sustainable world,we are proud of our progress in 2023 a challenging year,defined in many ways by economic instability,geopolitical tensions,high inflation,and a tight labor market.We have proven we can navigate these challenges well.The next few years will no doubt bring new and different challenges,and the landscape will continue to evolve.To remain an industry leader,we must continue to evolve too,seizing new opportunities.Were coming from a position of strength:weve spent a lot of time and resources building up our technology,our world class talent,our brands,and our capabilities.Now,we need to do the hard work of building on some very strong years to perform to our full potential in 2024 andbeyond.To achieve profitable growth in the years ahead,we will work to accelerate our growth in North America($55billion in 2023 reported net revenue)by capturing new consumer needs and occasions,and well continue to scale our International business($36 billion in 2023 reported net revenue)by broadening our presence and availability in key markets where there are many opportunities to develop our categories.Central to our growth strategy will be building up core capabilities,including:Advancing consumer-centric innovation by offering more positive choices,delivering new flavors and packaging options,building new ways for consumers to connect with our brands across different occasions,providing opportunities to customize and personalize products,and extending our brands into new channels;Digitalizing our company by leveraging cutting-edge technologies,such as artificial intelligence and machine learning,to gain more consumer insights and analytics,develop faster and more agile forecasting,and deliver better execution and performance from the plant to the shelf;and Accelerating and expanding our productivity,with more automation at our plants and warehouses to empower frontline decision-making,greater optimization across our transportation and fleet network,and greater focus on cost management and eliminating waste.I am more confident than ever that our Winning with pep strategy is the right one to achieve these goals and make us an even Faster,even Stronger,and even Bettercompany.We have the right team to get us there.Our people are the key to our success,and I am proud of our leaders and our associates who continue to deliver exceptional results in a dynamic and complex operating environment.Id like to also extend my gratitude to our partners and suppliers around the world for showing us what best-in-class collaboration looks like.With their continued support and the support of all our stakeholders we will be well-positioned to achieve our goals for 2024 and move closer to performing to our full potential.Thank you for your continued support and for trusting us with your investment.Ramon L.LaguartaPepsiCo Chairman of the Board of Directors and Chief Executive OfficerPepsiCo Annual Report 2023 3Positive Choices:PEPSICO LEADERSHIPPEPSICO BOARD OF DIRECTORSRamon L.LaguartaChairman of the Board of Directors and Chief Executive OfficerJim Andrew Executive Vice President and Chief Sustainability OfficerJames T.CaulfieldExecutive Vice President and Chief Financial OfficerDavid J.Flavell Executive Vice President,General Counsel and Corporate SecretaryAthina Kanioura Executive Vice President and Chief Strategy and Transformation OfficerStephen KehoeExecutive Vice President,Chief Corporate Affairs Officer and Chairman of the Board of Directors,PepsiCo FoundationRam KrishnanChief Executive Officer,PepsiCo Beverages North AmericaRen Lammers Executive Vice President and Chief Science OfficerSilviu Popovici Chief Executive Officer,EuropeGregg Roden Executive Vice President and Chief Operations OfficerPaula Santilli Chief Executive Officer,Latin AmericaBecky SchmittExecutive Vice President and Chief Human Resources OfficerWern-Yuen TanChief Executive Officer,Asia Pacific,Australia,New Zealand and China,and Chief Commercial OfficerJane WakelyExecutive Vice President,Chief Consumer and Marketing Officer and Chief Growth Officer,International FoodsEugene WillemsenChief Executive Officer,Africa,Middle East,South Asia,and International BeveragesSteven Williams Chief Executive Officer,PepsiCo Foods North AmericaSegun AgbajeGroup Chief Executive Officer,Guaranty Trust Holding Company Plc (GTCO Plc)Elected 2020Jennifer BaileyVice President,Internet Services,Apple Pay,Apple,Inc.Elected 2023Cesar CondeChairman,NBCUniversal News GroupElected 2016Ian CookFormer Chairman,President and Chief Executive Officer,Colgate-Palmolive CompanyElected 2008Edith W.CooperFormer Executive Vice President and Global Head,Human Capital Management,The Goldman Sachs Group,Inc.Elected 2021Susan M.DiamondChief Financial Officer,Humana,Inc.Elected 2023Dina DublonFormer Executive Vice President and Chief Financial Officer,JPMorgan Chase&Co.Elected 2005Michelle GassPresident and Chief Executive Officer,Levi Strauss&Co.Elected 2019Ramon L.LaguartaChairman of the Board of Directors and Chief Executive Officer,PepsiCoElected 2018Sir Dave J.LewisFormer Group Chief Executive Officer,Tesco PLC;Chair,Haleon plc;Chairman of Xlinks Elected 2020David C.Page,MDProfessor,Massachusetts Institute of Technology;Former Director and President,Whitehead Institute for Biomedical Research Elected 2014Robert C.PohladPresident of various family-owned entities;Former Chairman and Chief Executive Officer,PepsiAmericas,Inc.Elected 2015Daniel Vasella,MDFormer Chairman and Chief Executive Officer,Novartis AGElected 2002Darren WalkerPresident,Ford FoundationElected 2016Alberto WeisserFormer Chairman and Chief Executive Officer,Bunge Limited Elected 2011This list is as of March 22,2024.This list is as of March 22,2024.2023 Citizenship Giving(in millions)PepsiCo Foundation$47Corporate Contributions7Division Contributions23Division Estimated In-kind108Total$1852023 Diversity StatisticsWomen%(Global)People of Color 1%(U.S.Only)Board of Directors33%2Senior Executives 3278%Executives412%All Managers454%All Employees27I%The data in this chart is as of December 30,2023.1.Based on completed self-identification forms.Defined as ethnically/racially diverse individuals.2.Global.3.Composed of PepsiCo Executive Officers subject to Section 16 of the Securities Exchange Act of 1934.See pages 2729 of our Annual Report on Form 10-K for a list of PepsiCo Executive Officers subject to Section 16 of the Securities Exchange Act of 1934.4 PepsiCo Annual Report 2023For the fiscal year ended December30,2023PepsiCo,Inc.Annual Report 2023Form 10-KPage intentionally left blank UNITED STATES SECURITIES AND EXCHANGE COMMISSIONWASHINGTON,D.C.20549FORM 10-K(Mark One)ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)OF THE SECURITIES EXCHANGE ACT OF 1934For the fiscal year ended December 30,2023 ORTRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)OF THE SECURITIES EXCHANGE ACT OF 1934For the transition period from to Commission file number 1-1183 PepsiCo,Inc.(Exact Name of Registrant as Specified in its Charter)North Carolina 13-1584302(State or Other Jurisdiction of Incorporation or Organization)(I.R.S.Employer Identification No.)700 Anderson Hill Road,Purchase,New York 10577(Address of principal executive offices and Zip Code)(914)253-2000 Registrants telephone number,including area codeSecurities registered pursuant to Section 12(b)of the Securities Exchange Act of 1934:Title of each classTrading SymbolsName of each exchange on which registeredCommon Stock,par value 1-2/3 cents per sharePEPThe Nasdaq Stock Market LLC0.250%Senior Notes Due 2024PEP24The Nasdaq Stock Market LLC2.625%Senior Notes Due 2026PEP26The Nasdaq Stock Market LLC0.750%Senior Notes Due 2027PEP27The Nasdaq Stock Market LLC0.875%Senior Notes Due 2028PEP28The Nasdaq Stock Market LLC0.500%Senior Notes Due 2028PEP28AThe Nasdaq Stock Market LLC3.200%Senior Notes Due 2029PEP29The Nasdaq Stock Market LLC1.125%Senior Notes Due 2031PEP31The Nasdaq Stock Market LLC0.400%Senior Notes Due 2032PEP32The Nasdaq Stock Market LLC0.750%Senior Notes Due 2033PEP33The Nasdaq Stock Market LLC3.550%Senior Notes Due 2034PEP34The Nasdaq Stock Market LLC0.875%Senior Notes Due 2039PEP39The Nasdaq Stock Market LLC1.050%Senior Notes Due 2050PEP50The Nasdaq Stock Market LLCSecurities registered pursuant to Section 12(g)of the Securities Exchange Act of 1934:NoneIndicate by check mark if the registrant is a well-known seasoned issuer,as defined in Rule 405 of the Securities Act.Yes No Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d)of the Act.Yes No 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 No Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T(232.405 of this chapter)during the preceding 12 months(or for such shorter period that the registrant was required to submit such files).Yes No Indicate by check mark whether the registrant is a large accelerated filer,an accelerated filer,a non-accelerated filer,a smaller reporting company,or an emerging growth company.See the definitions of“large accelerated filer,”“accelerated filer,”“smaller reporting company,”and“emerging growth company”in Rule 12b-2 of the Exchange Act.Large accelerated filerAccelerated filerNon-accelerated filerSmaller reporting companyEmerging growth companyIf an emerging growth company,indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a)of the Exchange Act.Indicate by check mark whether the registrant has filed a report on and attestation to its managements assessment of the effectiveness of its internal control over financial reporting under Section 404(b)of the Sarbanes-Oxley Act(15 U.S.C.7262(b)by the registered public accounting firm that prepared or issued its audit report.If securities are registered pursuant to Section 12(b)of the Act,indicate by check mark whether the financial statements of the registrant included in the filing reflect the correction of an error to previously issued financial statements.Indicate by check mark whether any of those error corrections are restatements that required a recovery analysis of incentive-based compensation received by any of the registrants executive officers during the relevant recovery period pursuant to 240.10D-1(b).Indicate by check mark whether the registrant is a shell company(as defined in Rule 12b-2 of the Exchange Act).Yes No The aggregate market value of PepsiCo,Inc.Common Stock held by nonaffiliates of PepsiCo,Inc.(assuming for these purposes,but without conceding,that all executive officers and directors of PepsiCo,Inc.are affiliates of PepsiCo,Inc.)as of June 16,2023,the last day of business of our most recently completed second fiscal quarter,was$255.9 billion(based on the closing sale price of PepsiCo,Inc.s Common Stock on that date as reported on the Nasdaq Global Select Market).The number of shares of PepsiCo,Inc.Common Stock outstanding as of February 2,2024 was 1,374,429,271.Documents Incorporated by ReferencePortions of the Proxy Statement relating to PepsiCo,Inc.s 2024 Annual Meeting of Shareholders are incorporated by reference into Part III of this Form 10-K.PepsiCo,Inc.Form 10-K Annual ReportFor the Fiscal Year Ended December 30,2023 Table of Contents PART IItem 1.Business2Item 1A.Risk Factors11Item 1B.Unresolved Staff Comments24Item 1C.Cybersecurity24Item 2.Properties26Item 3.Legal Proceedings27Item 4.Mine Safety Disclosures27PART IIItem 5.Market for Registrants Common Equity,Related Stockholder Matters and Issuer Purchases of Equity Securities30Item 7.Managements Discussion and Analysis of Financial Condition and Results of Operations31Item 7A.Quantitative and Qualitative Disclosures About Market Risk119Item 8.Financial Statements and Supplementary Data119Item 9.Changes in and Disagreements with Accountants on Accounting and Financial Disclosure119Item 9A.Controls and Procedures119Item 9B.Other Information120Item 9C.Disclosure Regarding Foreign Jurisdictions that Prevent Inspections120PART IIIItem 10.Directors,Executive Officers and Corporate Governance120Item 11.Executive Compensation121Item 12.Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters121Item 13.Certain Relationships and Related Transactions,and Director Independence121Item 14.Principal Accounting Fees and Services121PART IVItem 15.Exhibits and Financial Statement Schedules122Item 16.Form 10-K Summary1221Forward-Looking StatementsThis Annual Report on Form 10-K contains statements reflecting our views about our future performance that constitute“forward-looking statements”within the meaning of the Private Securities Litigation Reform Act of 1995(Reform Act).Statements that constitute forward-looking statements within the meaning of the Reform Act are generally identified through the inclusion of words such as“aim,”“anticipate,”“believe,”“drive,”“estimate,”“expect,”“expressed confidence,”“forecast,”“future,”“goal,”“guidance,”“intend,”“may,”“objective,”“outlook,”“plan,”“position,”“potential,”“project,”“seek,”“should,”“strategy,”“target,”“will”or similar statements or variations of such words and other similar expressions.All statements addressing our future operating performance,and statements addressing events and developments that we expect or anticipate will occur in the future,are forward-looking statements within the meaning of the Reform Act.These forward-looking statements are based on currently available information,operating plans and projections about future events and trends.They inherently involve risks and uncertainties that could cause actual results to differ materially from those predicted in any such forward-looking statement.These risks and uncertainties include,but are not limited to,those described in“Item 1A.Risk Factors”and“Item 7.Managements Discussion and Analysis of Financial Condition and Results of Operations Our Business Our Business Risks.”Investors are cautioned not to place undue reliance on any such forward-looking statements,which speak only as of the date they are made.We undertake no obligation to update any forward-looking statement,whether as a result of new information,future events or otherwise.The discussion of risks in this report is by no means all-inclusive but is designed to highlight what we believe are important factors to consider when evaluating our future performance.PART IItem 1.Business.When used in this report,the terms“we,”“us,”“our,”“PepsiCo”and the“Company”mean PepsiCo,Inc.and its consolidated subsidiaries,collectively.Certain terms used in this Annual Report on Form 10-K are defined in the Glossary included in Item 7.of this report.Company OverviewWe were incorporated in Delaware in 1919 and reincorporated in North Carolina in 1986.We are a leading global beverage and convenient food company with a complementary portfolio of brands,including Lays,Doritos,Cheetos,Gatorade,Pepsi-Cola,Mountain Dew,Quaker and SodaStream.Through our operations,authorized bottlers,contract manufacturers and other third parties,we make,market,distribute and sell a wide variety of beverages and convenient foods,serving customers and consumers in more than 200 countries and territories.Our OperationsWe are organized into seven reportable segments(also referred to as divisions),as follows:1)Frito-Lay North America(FLNA),which includes our branded convenient food businesses in the United States and Canada;2)Quaker Foods North America(QFNA),which includes our branded convenient food businesses,such as cereal,rice,pasta and other branded food,in the United States and Canada;3)PepsiCo Beverages North America(PBNA),which includes our beverage businesses in the United States and Canada;4)Latin America(LatAm),which includes all of our beverage and convenient food businesses in Latin America;5)Europe,which includes all of our beverage and convenient food businesses in Europe;26)Africa,Middle East and South Asia(AMESA),which includes all of our beverage and convenient food businesses in Africa,the Middle East and South Asia;and7)Asia Pacific,Australia and New Zealand and China Region(APAC),which includes all of our beverage and convenient food businesses in Asia Pacific,Australia and New Zealand,and China region.Frito-Lay North AmericaEither independently or in conjunction with third parties,FLNA makes,markets,distributes and sells branded convenient foods.These foods include branded dips,Cheetos cheese-flavored snacks,Doritos tortilla chips,Fritos corn chips,Lays potato chips,Ruffles potato chips and Tostitos tortilla chips.FLNAs branded products are sold to independent distributors and retailers.In addition,FLNAs joint venture with Strauss Group makes,markets,distributes and sells Sabra refrigerated dips and spreads.Quaker Foods North AmericaEither independently or in conjunction with third parties,QFNA makes,markets,distributes and sells branded convenient foods,which include cereals,rice,pasta and other branded products.QFNAs products include Capn Crunch cereal,Life cereal,Pearl Milling Company syrups and mixes,Quaker Chewy granola bars,Quaker grits,Quaker oatmeal,Quaker rice cakes,Quaker Simply Granola and Rice-A-Roni side dishes.QFNAs branded products are sold to independent distributors and retailers.PepsiCo Beverages North AmericaEither independently or in conjunction with third parties,PBNA makes,markets and sells beverage concentrates,fountain syrups and finished goods under various beverage brands including Aquafina,Bubly,Diet Mountain Dew,Diet Pepsi,Gatorade,Gatorade Zero,Mountain Dew,Pepsi and Propel.PBNA operates its own bottling plants and distribution facilities and sells branded finished goods directly to independent distributors and retailers.PBNA also sells concentrate and finished goods for our brands to authorized and independent bottlers,who in turn sell our branded finished goods to independent distributors and retailers in certain markets.PBNA also,either independently or in conjunction with third parties,makes,markets,distributes and sells ready-to-drink tea and coffee products through joint ventures with Unilever(under the Lipton brand name)and Starbucks,respectively.Further,PBNA manufactures and distributes certain brands licensed from Keurig Dr Pepper Inc.,including Crush,Dr Pepper and Schweppes,and certain juice brands licensed from Dole Food Company,Inc.and Ocean Spray Cranberries,Inc.In 2022,PBNA began to distribute Hard MTN Dew,an alcoholic beverage manufactured and owned by the Boston Beer Company.In the first quarter of 2022,we sold our Tropicana,Naked and other select juice brands to PAI Partners,while retaining a 39%noncontrolling interest in a newly formed joint venture,Tropicana Brands Group(TBG),operating across North America and Europe(Juice Transaction).In the United States,PepsiCo acts as the exclusive distributor for TBGs portfolio of brands for small-format and foodservice customers with chilled direct-store-delivery(DSD).See Note 13 to our consolidated financial statements for further information.Latin America Either independently or in conjunction with third parties,LatAm makes,markets,distributes and sells a number of convenient food brands including Cheetos,Doritos,Emperador,Lays,Marias Gamesa,Ruffles,Sabritas,Saladitas and Tostitos,as well as many Quaker-branded convenient foods.LatAm also,either independently or in conjunction with third parties,makes,markets,distributes and sells beverage concentrates,fountain syrups and finished goods under various beverage brands including 7UP,Diet 7UP,Gatorade,H2oh!,Manzanita Sol,Mirinda,Pepsi,Pepsi Black,San Carlos and Toddy.These branded products are sold to authorized and independent bottlers,independent distributors and retailers.LatAm 3also,either independently or in conjunction with third parties,makes,markets,distributes and sells ready-to-drink tea products through an international joint venture with Unilever(under the Lipton brand name).EuropeEither independently or in conjunction with third parties,Europe makes,markets,distributes and sells a number of convenient food brands including Cheetos,Doritos,Lays,Ruffles and Walkers,as well as many Quaker-branded convenient foods,through consolidated businesses,as well as through noncontrolled affiliates.Europe also,either independently or in conjunction with third parties,makes,markets,distributes and sells beverage concentrates,fountain syrups and finished goods under various beverage brands including 7UP,Diet Pepsi,Lubimyj Sad,Mirinda,Pepsi and Pepsi Max.These branded products are sold to authorized and independent bottlers,independent distributors and retailers.In certain markets,however,Europe operates its own bottling plants and distribution facilities.Europe also,as part of its beverage business,manufactures and distributes SodaStream sparkling water makers and related products.Further,Europe makes,markets,distributes and sells a number of dairy products including Agusha,Chudo and Domik v Derevne.Europe also,either independently or in conjunction with third parties,makes,markets,distributes and sells ready-to-drink tea products through an international joint venture with Unilever(under the Lipton brand name).In the first quarter of 2022,we sold our Tropicana,Naked and other select juice brands to PAI Partners,while retaining a 39%noncontrolling interest in TBG,operating across North America and Europe.See Note 13 to our consolidated financial statements for further information.Africa,Middle East and South AsiaEither independently or in conjunction with third parties,AMESA makes,markets,distributes and sells a number of convenient food brands including Cheetos,Chipsy,Doritos,Kurkure,Lays,Sasko,Spekko and White Star,as well as many Quaker-branded convenient foods,through consolidated businesses,as well as through noncontrolled affiliates.AMESA also makes,markets,distributes and sells beverage concentrates,fountain syrups and finished goods under various beverage brands including 7UP,Aquafina,Mirinda,Mountain Dew and Pepsi.These branded products are sold to authorized and independent bottlers,independent distributors and retailers.In certain markets,however,AMESA operates its own bottling plants and distribution facilities.AMESA also,either independently or in conjunction with third parties,makes,markets,distributes and sells ready-to-drink tea products through an international joint venture with Unilever(under the Lipton brand name).Asia Pacific,Australia and New Zealand and China RegionEither independently or in conjunction with third parties,APAC makes,markets,distributes and sells a number of convenient food brands including BaiCaoWei,Cheetos,Doritos,Lays and Smiths,as well as many Quaker-branded convenient foods,through consolidated businesses,as well as through noncontrolled affiliates.APAC also makes,markets,distributes and sells beverage concentrates,fountain syrups and finished goods under various beverage brands including 7UP,Aquafina,Mirinda,Mountain Dew,Pepsi and Sting.These branded products are sold to authorized and independent bottlers,independent distributors and retailers.APAC also,either independently or in conjunction with third parties,makes,markets,distributes and sells ready-to-drink tea products through an international joint venture with Unilever(under the Lipton brand name).Our Distribution NetworkOur products are primarily brought to market through DSD,customer warehouse and distributor networks and are also sold directly to consumers through e-commerce platforms and retailers.The distribution system used depends on customer needs,product characteristics and local trade practices.4Direct-Store-DeliveryWe,our independent bottlers and our distributors operate DSD systems that deliver beverages and convenient foods directly to retail stores where the products are merchandised by our employees or our independent bottlers.DSD enables us to merchandise with maximum visibility and appeal.DSD is especially well-suited to products that are restocked often and respond to in-store promotion and merchandising.Customer WarehouseSome of our products are delivered from our manufacturing plants and distribution centers,both company and third-party operated,to customer warehouses.These less costly systems generally work best for products that are less fragile and perishable,and have lower turnover.Distributor NetworksWe distribute many of our products through third-party distributors.Third-party distributors are particularly effective when greater distribution reach can be achieved by including a wide range of products on the delivery vehicles.For example,our foodservice and vending business distributes beverages and convenient foods to restaurants,businesses,schools and stadiums through third-party foodservice and vending distributors and operators.E-commerceOur products are also available and sold directly to consumers on a growing number of company-owned and third-party e-commerce websites and mobile commerce applications.Ingredients and Other SuppliesThe principal ingredients we use in our beverage and convenient food products are acesulfame potassium,aspartame,corn,corn sweeteners,flavorings,flour,juice concentrates,oats,potatoes,raw milk,rice,seasonings,sucralose,sugar,vegetable and essential oils,and wheat.We also use water in the manufacturing of our products.Our key packaging materials include plastic resins,including polyethylene terephthalate(PET)and polypropylene resins used for plastic beverage bottles and film packaging used for convenient foods,aluminum,glass,closures,cardboard and paperboard cartons.In addition,we continue to integrate recyclability into our product development process and support the increased use of recycled content,including recycled PET,in our packaging.Fuel,electricity and natural gas are also important commodities for our businesses due to their use in our and our business partners facilities and the vehicles delivering our products.We employ specialists to secure adequate supplies of many of these items and have not experienced any significant continuous shortages that would prevent us from meeting our requirements.Many of these ingredients,raw materials and commodities are purchased in the open market.The prices we pay for such items are subject to fluctuation,and we manage this risk through the use of fixed-price contracts and purchase orders,pricing agreements and derivative instruments,including swaps and futures.In addition,risk to our supply of certain raw materials is mitigated through purchases from multiple geographies and suppliers.When prices increase,we may or may not pass on such increases to our customers.In addition,we continue to make investments to improve the sustainability and resources of our agricultural supply chain,including the development of our initiative to advance sustainable farming practices by our suppliers and expanding it further globally.During 2023,we continued to experience increased commodity,packaging and other input costs and,in some instances,supply constraints related to the deadly conflict in Ukraine,the inflationary cost environment,adverse weather conditions,supply chain disruptions and labor shortages,which may continue into fiscal 2024.See Note 9 to our consolidated financial statements for further information on how we manage our exposure to commodity prices.5We also maintain voluntary supply chain finance agreements with several participating global financial institutions,pursuant to which our suppliers,at their sole discretion,may elect to sell their accounts receivable with PepsiCo to such global financial institutions.These agreements did not have a material impact on our business or financial results.See“Our Financial Results Our Liquidity and Capital Resources”in“Item 7.Managements Discussion and Analysis of Financial Condition and Results of Operations”and Note 14 to our consolidated financial statements for further information.Our Brands and Intellectual Property RightsWe own numerous valuable trademarks which are essential to our worldwide businesses,including Agusha,Amp Energy,Aquafina,Aquafina Flavorsplash,Arto Lifewtr,Baja Blast,BaiCaoWei,Bare,Bokomo,Bubly,Capn Crunch,Ceres,Cheetos,Chesters,Chipsy,Chokis,Chudo,Cracker Jack,Crunchy,Diet Mountain Dew,Diet Mug,Diet Pepsi,Diet 7UP(outside the United States),Domik v Derevne,Doritos,Driftwell,Duyvis,Elma Chips,Emperador,Evolve,Fast Twitch,Frito-Lay,Fritos,Fruktovy Sad,G2,Gamesa,Gatorade,Gatorade Fit,Gatorade Zero,Gatorlyte,Grandmas,H2oh!,Hard MTN Dew,Health Warrior,Imunele,J7,Kas,Kurkure,Lays,Life,Lifewtr,Liquifruit,Lubimyj Sad,Manzanita Sol,Marias Gamesa,Matutano,Mirinda,Miss Vickies,Moirs,Mothers,Mountain Dew,Mountain Dew Code Red,Mountain Dew Game Fuel,Mountain Dew Kickstart,Mountain Dew Zero Sugar,MTN Dew Energy,Mug,Munchies,Muscle Milk,Near East,Off the Eaten Path,Paso de los Toros,Pasta Roni,Pearl Milling Company,Pepsi,Pepsi Black,Pepsi Max,Pepsi Zero Sugar,PopCorners,Pronutro,Propel,Quaker,Quaker Chewy,Quaker Simply Granola,Rice-A-Roni,Rockstar Energy,Rold Gold,Ruffles,Sabritas,Safari,Sakata,Saladitas Gamesa,San Carlos,Sandora,Santitas,Sasko,7UP(outside the United States),7UP Free(outside the United States),Simba,Smartfood,Smiths,Snack a Jacks,SoBe,SodaStream,Sonrics,Spekko,Stacys,Starry,Starry Zero Sugar,Sting,Stubborn Soda,SunChips,Toddy,Toddynho,Tostitos,V Water,Vesely Molochnik,Walkers,Weetbix,White Star,Ya and Yachak.We also hold long-term licenses to use valuable trademarks in connection with our products in certain markets,including Ocean Spray.We also distribute Celsius energy drinks and various Keurig Dr Pepper Inc.brands,including Dr Pepper in certain markets,Crush and Schweppes.Joint ventures in which we have an ownership interest either own or have the right to use certain trademarks,such as Lipton,Sabra and Starbucks.In addition,in the first quarter of 2022,we sold our Tropicana,Naked and other select juice brands to PAI Partners,while retaining a 39%noncontrolling interest in TBG,operating across North America and Europe.In the United States,PepsiCo acts as the exclusive distributor for TBGs portfolio of brands for small-format and foodservice customers with chilled DSD.See Note 13 to our consolidated financial statements for further information.In 2022,we began to distribute Hard MTN Dew,an alcoholic beverage manufactured and owned by the Boston Beer Company.We have licensed the use of the Hard MTN Dew trademark to the Boston Beer Company,which has appointed us as their distributor for this product.Trademarks remain valid so long as they are used properly for identification purposes,and we emphasize correct use of our trademarks.We have authorized,through licensing arrangements,the use of many of our trademarks in such contexts as convenient food joint ventures and beverage bottling appointments.In addition,we license the use of our trademarks on merchandise that is sold at retail,which enhances brand awareness.We either own or have licenses to use a number of patents which relate to certain of our products,their packaging,the processes for their production and the design and operation of various equipment used in our businesses.Some of these patents are licensed to others.SeasonalityOur businesses are affected by seasonal variations.Our beverage and convenient food sales are generally highest in the third quarter due to seasonal and holiday-related patterns and generally lowest in the first quarter.However,taken as a whole,seasonality has not had a material impact on our consolidated financial results.6Our CustomersOur customers include wholesale and other distributors,foodservice customers,grocery stores,drug stores,convenience stores,discount/dollar stores,mass merchandisers,membership stores,hard discounters,e-commerce retailers and authorized independent bottlers,among others.We normally grant our independent bottlers exclusive contracts to sell and manufacture certain beverage products bearing our trademarks within a specific geographic area.These arrangements provide us with the right to charge our independent bottlers for concentrate,finished goods and Aquafina royalties and specify the manufacturing process required for product quality.We also grant distribution rights to our independent bottlers for certain beverage products bearing our trademarks for specified geographic areas.We rely on and provide financial incentives to our customers to assist in the distribution and promotion of our products to the consumer.For our independent distributors and retailers,these incentives include volume-based rebates,product placement fees,promotions and displays.For our independent bottlers,these incentives are referred to as bottler funding and are negotiated annually with each bottler to support a variety of trade and consumer programs,such as consumer incentives,advertising support,new product support,and vending and cooler equipment placement.Consumer incentives include pricing discounts and promotions,and other promotional offers.Advertising support is directed at advertising programs and supporting independent bottler media.New product support includes targeted consumer and retailer incentives and direct marketplace support,such as point-of-purchase materials,product placement fees,media and advertising.Vending and cooler equipment placement programs support the acquisition and placement of vending machines and cooler equipment.The nature and type of programs vary annually.Changes to the retail landscape,including increased consolidation of retail ownership,the continued growth of sales through e-commerce websites and mobile commerce applications,including through subscription services and other direct-to-consumer businesses,the integration of physical and digital operations among retailers,as well as the international expansion of hard discounters,and the current economic environment continue to increase the importance of major customers.In 2023,sales to Walmart Inc.(Walmart)and its affiliates,including Sams Club(Sams),represented approximately 14%of our consolidated net revenue,with sales reported across all of our divisions,including concentrate sales to our independent bottlers,which were used in finished goods sold by them to Walmart.The loss of this customer would have a material adverse effect on our FLNA,QFNA and PBNA divisions.Our CompetitionOur beverage and convenient food products are in highly competitive categories and markets and compete against products of international beverage and convenient food companies that,like us,operate in multiple geographies,as well as regional,local and private label manufacturers and economy brands and other competitors,including smaller companies developing and selling micro brands directly to consumers through e-commerce platforms or through retailers focused on locally-sourced products.In many countries in which our products are sold,including the United States,The Coca-Cola Company is our primary beverage competitor.Other beverage and convenient food competitors include,but are not limited to,Campbell Soup Company,Conagra Brands,Inc.,Hormel Foods Corporation,Kellanova,Keurig Dr Pepper Inc.,The Kraft Heinz Company,Link Snacks,Inc.,Mondelz International,Inc.,Monster Beverage Corporation,Nestl S.A.,Red Bull GmbH and Utz Brands,Inc.Many of our convenient food products hold significant leadership positions in the convenient food industry in the United States and worldwide.In 2023,we and The Coca-Cola Company represented approximately 19%and 20%,respectively,of the U.S.liquid refreshment beverage category by estimated retail sales in measured channels,according to Information Resources,Inc.However,The Coca-Cola Company has significant carbonated soft drink(CSD)share advantage in many markets outside the United States.7Our beverage and convenient food products compete primarily on the basis of brand recognition and loyalty,taste,price,value,quality,product variety,innovation,distribution,shelf space,advertising,marketing and promotional activity(including digital),packaging,convenience,service and the ability to anticipate and effectively respond to consumer preferences and trends,including increased consumer focus on health and wellness and sustainability and the continued acceleration of e-commerce and other methods of distributing and purchasing products.Success in this competitive environment is dependent on effective promotion of existing products,effective introduction of new products and reformulations of existing products,increased efficiency in production techniques,effective incorporation of technology and digital tools across all areas of our business,the effectiveness of our advertising campaigns,marketing programs,product packaging and pricing,new vending and dispensing equipment and brand and trademark development and protection.We believe that the strength of our brands,innovation and marketing,coupled with the quality of our products and flexibility of our distribution network,allows us to compete effectively.Research and DevelopmentWe engage in a variety of research and development activities and invest in innovation globally with the goal of meeting the needs of our customers and consumers and accelerating growth.These activities principally involve:innovations focused on creating consumer preferred products to grow and transform our portfolio through development of new technologies,ingredients,flavors and substrates;development and improvement of our manufacturing processes,including reductions in cost and environmental footprint;implementing product improvements to our global portfolio that reduce added sugars,sodium or saturated fat;offering more products with functional ingredients and positive nutrition including legumes,whole grains,fruits and vegetables,nuts and seeds,dairy,protein(including plant-based proteins),fiber,micronutrients and hydration;development of packaging technology and new package designs,including reducing the amount of plastic in our packaging and developing recyclable,compostable,biodegradable,reusable or otherwise sustainable packaging;development of marketing,merchandising and dispensing equipment;further expanding our beyond the bottle portfolio including innovation for our SodaStream business;investments in technology and digitalization,including artificial intelligence and data analytics to enhance our consumer insights and research;continuing to strengthen our omnichannel capabilities,particularly in e-commerce;and efforts focused on reducing our impact on the environment,including reducing water use in our operations and our agricultural practices and reducing our environmental impact in our operations throughout our value chain.Our research centers are located around the world,including in Brazil,China,India,Ireland,Mexico,Russia,South Africa,the United Kingdom and the United States,and leverage consumer insights,food science and engineering to meet our strategy to continually innovate our portfolio of beverages and convenient foods.Regulatory Matters The conduct of our businesses,including the production,storage,distribution,sale,display,advertising,marketing,labeling,content,quality,safety,transportation,packaging,disposal,recycling and use of our products,as well as our employment and occupational health and safety practices and protection of personal information,are subject to various laws and regulations administered by federal,state and local governmental agencies in the United States,as well as to laws and regulations administered by government entities and agencies in the more than 200 other countries and territories in which our products are made,manufactured,distributed or sold.It is our policy to abide by the laws and regulations around the world that apply to our businesses.The U.S.laws and regulations that we are subject to include,but are not limited to:the Federal Food,Drug and Cosmetic Act and various state laws governing food safety and food labeling;the Food Safety 8Modernization Act;the Occupational Safety and Health Act and various state laws and regulations governing workplace health and safety;various federal,state and local environmental protection laws,as discussed below;the Federal Motor Carrier Safety Act;the Federal Trade Commission Act;the Lanham Act and various state law statutory and common law duties regarding false advertising;various federal and state laws and regulations governing competition and trade practices,including the Robinson-Patman Act and the Clayton Act;various federal and state laws and regulations governing our employment practices,including those related to equal employment opportunity,such as the Equal Employment Opportunity Act and the National Labor Relations Act and those related to overtime compensation,such as the Fair Labor Standards Act;various state and federal laws pertaining to sale and distribution of alcohol beverages;data privacy and personal data protection laws and regulations,including the California Consumer Privacy Act of 2018(as modified by the California Privacy Rights Act);customs and foreign trade laws and regulations,including laws regarding the import or export of our products or ingredients used in our products and tariffs;laws regulating the sale of certain of our products in schools;laws regulating the ingredients or substances contained in,or attributes of,our products;laws regulating our supply chain,including the 2010 California Transparency in Supply Chains Act and laws relating to the payment of taxes.We are also required to comply with the Foreign Corrupt Practices Act and the Trade Sanctions Reform and Export Enhancement Act.We are also subject to various state and local statutes and regulations,including state consumer protection laws such as Proposition 65 in California,which requires that a specific warning appear on any product that contains a substance listed by the State of California as having been found to cause cancer or birth defects,unless the amount of such substance in the product is below a safe harbor level.We are subject to numerous similar and other laws and regulations outside the United States,including but not limited to laws and regulations governing food safety,international trade and tariffs,supply chains,including the U.K.Modern Slavery Act,occupational health and safety,competition,anti-corruption and data privacy,including the European Union General Data Protection Regulation.In many jurisdictions,compliance with competition laws is of special importance to us due to our competitive position in those jurisdictions,as is compliance with anti-corruption laws,including the U.K.Bribery Act.We rely on legal and operational compliance programs,as well as in-house and outside counsel and other experts,to guide our businesses in complying with the laws and regulations around the world that apply to our businesses.Certain jurisdictions have either imposed,or are considering imposing,new or increased taxes on the manufacture,distribution or sale of our products,ingredients or substances contained in,or attributes of,our products or commodities used in the production of our products.These taxes vary in scope and form:some apply to all beverages,including non-caloric beverages,while others apply only to beverages with a caloric sweetener(e.g.,sugar).Similarly,some measures apply a single tax rate per ounce/liter on beverages containing over a certain level of added sugar(or other sweetener)while others apply a graduated tax rate depending upon the amount of added sugar(or other sweetener)in the beverage and some apply a flat tax rate on beverages containing a particular substance or ingredient,regardless of the level of such substance or ingredient.Certain jurisdictions have either imposed,or are considering imposing,product labeling or warning requirements or other limitations on the marketing or sale of certain of our products as a result of ingredients or substances contained in such products or the audience to whom products are marketed.These types of provisions have required that we highlight perceived concerns about a product,warn consumers to avoid consumption of certain ingredients or substances present in our products,restrict the age of consumers to whom products are marketed or sold,limit the location in which our products may be available or discontinue the use of certain ingredients.It is possible that similar or more restrictive requirements may be proposed or enacted in the future.9Certain jurisdictions have either imposed or are considering imposing regulations designed to increase recycling rates,encourage waste reduction,restrict the sale of products utilizing certain packaging or to carry warnings about the environmental impact of plastic packaging.These regulations vary in scope and form from deposit return systems designed to incentivize the return of beverage containers,to extended producer responsibility policies and even restrictions or bans on the use of certain types of packaging,including single-use plastics and packaging containing per-and polyfluoroalkyl substances(PFAS).It is possible that similar or more restrictive requirements may be proposed or enacted in the future.We are also subject to national and local environmental laws in the United States and in foreign countries in which we do business,including laws related to water consumption and treatment,wastewater discharge and air emissions.In the United States,we are subject to the Clean Air Act,the Clean Water Act,the Comprehensive Environmental Response,Compensation and Liability Act,the Resource Conservation and Recovery Act and other federal,state and local laws and regulations regarding handling,storage,release and disposal of wastes generated onsite and sent to third-party owned and operated offsite licensed facilities.Our operations outside the United States are subject to similar laws and regulations.In addition,continuing concern over environmental,social and governance matters,including climate change,is expected to continue to result in new or increased legal and regulatory requirements(in or outside of the United States)to reduce emissions to mitigate the potential effects of greenhouse gases,to limit or impose additional costs on commercial water use due to local water scarcity concerns or to expand mandatory reporting of certain environmental,social and governance metrics.Our policy is to abide by all applicable environmental laws and regulations,and we have internal programs in place with respect to our global environmental compliance.We have made,and plan to continue making,necessary expenditures for compliance with applicable environmental laws and regulations and to achieve our sustainability goals.While these expenditures have not had a material impact on our business,financial condition or results of operations to date,changes in environmental compliance requirements,and expenditures necessary to comply with such requirements or to achieve our sustainability goals,could adversely affect our financial performance.In addition,we and our subsidiaries are subject to environmental remediation obligations arising in the normal course of business,as well as remediation and related indemnification obligations in connection with certain historical activities and contractual obligations,including those of businesses or properties acquired by us or our subsidiaries.While these environmental remediation and indemnification obligations cannot be predicted with certainty,such obligations have not had,and are not expected to have,a material impact on our capital expenditures,earnings or competitive position.In addition to the discussion in this section,see also“Item 1A.Risk Factors.”Human CapitalPepsiCo believes that human capital management,including attracting,developing and retaining a high quality workforce,is critical to our long-term success.Our Board of Directors(Board)and its Committees provide oversight on a broad range of human capital management topics,including corporate culture,diversity,equity and inclusion,pay equity,health and safety,training and development and compensation and benefits.We employed approximately 318,000 people worldwide as of December 30,2023,including approximately 134,000 people within the United States.We are party to numerous collective bargaining agreements and believe that relations with our employees are generally good.Protecting the safety,health,and well-being of our associates around the world is PepsiCos top priority.We strive to achieve an injury-free work environment.We also continue to invest in emerging technologies to protect our employees from injuries,including leveraging fleet telematics and distracted driving technology,resulting in reductions in road traffic incidents,and deploying ergonomic and machine safety risk reduction solutions.10We believe that our culture of diversity,equity and inclusion is a competitive advantage that fuels innovation,enhances our ability to attract and retain talent and strengthens our reputation.We continually strive to improve the attraction,retention,and advancement of diverse associates to ensure we sustain a high-caliber pipeline of talent that also represents the communities we serve.As of December 30,2023,our global workforce was approximately 27male,while management roles were approximately 45male.As of December 30,2023,approximately 49%of our U.S.workforce was comprised of racially/ethnically diverse individuals,of which approximately 34%of our U.S.associates in managerial roles were racially/ethnically diverse individuals.The Board has overseen appointments of current direct reports of our Chief Executive Officer,who include 7 executives globally who are racially/ethnically diverse and/or female.We are also committed to the continued growth and development of our associates.PepsiCo supports and develops its associates through a variety of global training and development programs that build and strengthen employees leadership and professional skills,including career development plans,mentoring programs and in-house learning opportunities,such as PEP U Degreed,our internal global online learning resource.In 2023,PepsiCo employees completed over 1.5 million hours of training.Available InformationWe are required to file annual,quarterly and current reports,proxy statements and other information with the U.S.Securities and Exchange Commission(SEC).The SEC maintains an Internet site that contains reports,proxy and information statements,and other information regarding issuers that file electronically with the SEC at http:/www.sec.gov.Our Annual Reports on Form 10-K,Quarterly Reports on Form 10-Q,Current Reports on Form 8-K,proxy statements and amendments to those documents filed or furnished pursuant to Section 13(a)or 15(d)of the Securities Exchange Act of 1934,as amended(Exchange Act),are also available free of charge on our Internet site at http:/ as soon as reasonably practicable after such reports are electronically filed with or furnished to the SEC.Investors should note that we currently announce material information to our investors and others using filings with the SEC,press releases,public conference calls,webcasts or our corporate website(),including news and announcements regarding our financial performance,key personnel,our brands and our business strategy.Information that we post on our corporate website could be deemed material to investors.We encourage investors,the media,our customers,consumers,business partners and others interested in us to review the information we post on these channels.We may from time to time update the list of channels we will use to communicate information that could be deemed material and will post information about any such change on .The information on our website is not,and shall not be deemed to be,a part hereof or incorporated into this or any of our other filings with the SEC.Item 1A.Risk Factors.The following risks,some of which have occurred and any of which may occur in the future,can have a material adverse effect on our business or financial performance,which in turn can affect the price of our publicly traded securities.These are not the only risks we face.There may be other risks we are not currently aware of or that we currently deem not to be material but that may become material in the future.Business RisksRisks associated with the deadly conflict in Ukraine The deadly conflict in Ukraine and related sanctions have continued to result in worldwide geopolitical and macroeconomic uncertainty.The conflict has resulted and could continue to result in volatile commodity markets,supply chain disruptions,increased risk of cyber incidents or other disruptions to our 11information systems,reputational risk,heightened risks to employee safety,business disruptions(including labor shortages),significant volatility of the Russian ruble,limitations on access to credit markets and other corporate banking services,including working capital facilities,reduced availability and increased costs for transportation,energy,packaging and raw materials and other input costs,environmental,health and safety risks related to securing and maintaining facilities,additional sanctions,export controls and other legislation or regulations(including restrictions on the transfer of funds to and from Russia).The ongoing conflict could result in the temporary or permanent loss of assets,including the nationalization or expropriation of assets,result in additional impairment charges or significantly affect our ability to manage our operations in these markets which could result in the deconsolidation of such businesses.We cannot predict how and the extent to which the conflict will continue to affect our employees,operations,customers,consumers or business partners or our ability to achieve certain of our sustainability goals.The conflict has adversely affected and could continue to adversely affect demand for our products and our global business.Reduction in future demand for our products would adversely affect our business.Demand for our products depends in part on our ability to innovate and anticipate and effectively respond to shifts in consumer trends and preferences,including the types of products our consumers want and how they browse for,purchase and consume them.Consumer preferences continuously evolve due to a variety of factors,including:changes in consumer demographics,consumption patterns,diet(whether due to changes in consumer behavior and eating habits,the use of weight-loss drugs or other factors)and channel preferences(including continued increases in the e-commerce and online-to-offline channels);pricing;product quality;concerns or perceptions regarding packaging and its environmental impact(such as single-use and other plastic packaging);and concerns or perceptions regarding the nutrition profile and health effects of,or location of origin of,ingredients or substances in our products or packaging,including due to the results of third-party studies(whether or not scientifically valid).Concerns with any of the foregoing could lead consumers to reduce or publicly boycott the purchase or consumption of our products.Pandemics,epidemics or other disease outbreaks,such as COVID-19,and geopolitical events,wars and other military conflicts have also impacted and could continue to impact consumer preferences and demand for our products.Consumer preferences are also influenced by perception of our brand image or the brand images of our products,the success of our advertising and marketing campaigns,our ability to engage with our consumers in the manner they prefer,including through the use of digital media or assets,and the perception of our use of social media and our response to political and social issues,geopolitical events,wars and other military conflicts or catastrophic events.These and other factors have reduced and could continue to reduce consumers willingness to purchase certain of our products,including as a result of public boycotts.Any inability on our part to anticipate or react to changes in consumer preferences and trends,or make the right strategic investments to do so,including investments in data analytics to understand consumer trends,can lead to reduced demand for our products,lead to inventory write-offs or erode our competitive and financial position,thereby adversely affecting our business.In addition,our business operations,including our supply chain,are subject to disruption by geopolitical events,wars and other military conflicts,natural disasters,pandemics,epidemics or other events beyond our control that could negatively impact product availability and decrease demand for our products if our crisis management plans do not effectively mitigate these issues.Damage to our reputation or brand image can adversely affect our business.Maintaining a positive reputation globally is critical to selling our products.Our reputation or brand image has in the past been,and could in the future be,adversely impacted by a variety of factors,including:any failure by us,our business partners,or other actors in the supply chain to maintain high ethical,business and environmental,social and governance practices,including with respect to human rights,child labor,diversity,equity and inclusion,workplace conditions and employee health and safety;any failure,or 12perception of a failure,to achieve our environmental,social and governance goals,or any negative perception toward such goals,including with respect to the nutrition profile of our products,diversity,equity and inclusion initiatives,packaging,water use and our impact on the environment;any failure to address health or other concerns about our products,products we distribute(including alcoholic beverages),or particular ingredients in our products,including concerns regarding whether certain of our products contribute to obesity and other health conditions or an increase in public health costs;our research and development efforts;any product quality or safety issues,including the recall of any of our products;any failure to comply with laws and regulations;consumer perception of our advertising campaigns,sponsorship arrangements,marketing programs,use of social media and our response to political and social issues,geopolitical events,wars and other military conflicts or catastrophic events;or any failure to effectively respond to negative or inaccurate comments about us on social media or otherwise regarding any of the foregoing.Damage to our reputation or brand image has in the past and could in the future decrease demand for our products,thereby adversely affecting our business.Product recalls or other issues or concerns with respect to product quality and safety can adversely affect our business.We have recalled,and could in the future recall,products due to product quality or safety issues,including actual or alleged mislabeling,misbranding,spoilage,undeclared allergens,adulteration or contamination.Joint ventures in which we have an interest have also recalled,and could in the future recall,products for the same or other reasons.Product recalls,including the voluntary recall of certain bars and cereals in our QFNA division(Quaker Recall),have in the past and could in the future adversely affect our business by resulting in losses due to their cost,the destruction of product inventory,customer fines and returns or lost sales due to any unavailability of the product for a period of time.In addition,product quality or safety issues have in the past and could in the future also reduce consumer confidence and demand for our products,cause production and delivery disruptions,including as a result of temporary or permanent closure of manufacturing plants or facilities,and result in increased costs(including payment of fines and/or judgments,cleaning and remediation costs and legal fees,and costs associated with alternative sources of production)and damage our reputation(or the reputation of joint ventures in which we have an interest),particularly as we or our joint ventures continue to expand into new categories,all of which can adversely affect our business.Any perception or allegation(whether or not valid)of failure to maintain adequate oversight over product quality or safety can result in product recalls,litigation,government investigations or inquiries or civil or criminal proceedings,all of which may result in fines,penalties,damages or criminal liability.Our business can also be adversely affected if consumers lose confidence in product quality,safety and integrity generally,even if such loss of confidence is unrelated to products in our portfolio.In addition,while we currently maintain insurance coverage that,subject to its terms and conditions,is intended to address costs associated with certain aspects of product recalls,this insurance coverage may not,depending on the specific facts and circumstances surrounding an incident,cover all losses or all types of claims that arise from an incident,or the damage to our reputation or brands that may result from an incident.Any inability to compete effectively can adversely affect our business.Our products compete against products of international beverage and convenient food companies that,like us,operate in multiple geographies,as well as regional,local and private label and economy brand manufacturers and other competitors,including smaller companies developing and selling micro brands directly to consumers through e-commerce platforms or through retailers focused on locally sourced products.In many countries in which our products are sold,including the United States,The Coca-Cola Company is our primary beverage competitor.Our products compete primarily on the basis of brand recognition and loyalty,taste,price,value,quality,product variety,innovation,distribution,shelf space,advertising,marketing and promotional activity,packaging,convenience,service and the ability to 13anticipate and effectively respond to consumer preferences and trends.Our business can be adversely affected if we are unable to effectively promote or develop our existing products or introduce and effectively market new products,if we are unable to effectively adopt new technologies,including artificial intelligence and data analytics to develop new commercial insights and improve operating efficiencies,if we are unable to continuously strengthen and evolve our capabilities in digital marketing,if our competitors spend more aggressively or effectively than we do or if we are otherwise unable to effectively respond to supply disruptions,pricing pressure(including as a result of commodity inflation)or otherwise compete effectively,and we may be unable to grow or maintain sales or category share or we may need to increase capital,marketing or other expenditures.Failure to attract,develop and maintain a highly skilled and diverse workforce or effectively manage changes in our workforce can have an adverse effect on our business.Our business requires that we attract,develop and maintain a highly skilled and diverse workforce.Our employees are highly sought after by our competitors and other companies and our continued ability to compete effectively depends on our ability to attract,retain,develop and motivate highly skilled personnel for all areas of our organization.Our ability to do so has been and may continue to be impacted by challenges in the labor market,which has experienced and may continue to experience wage inflation,labor shortages,increased employee turnover,changes in availability of our workforce and changing worker expectations regarding flexible work models.Any unplanned turnover,sustained labor shortage or unsuccessful implementation of our succession plans to backfill current leadership positions,including the Chief Executive Officer,or failure to attract,develop and maintain a highly skilled and diverse workforce,including with key capabilities such as e-commerce and digital marketing and data analytic skills,can deplete our institutional knowledge base,erode our competitive advantage or result in increased costs due to increased competition for employees,higher employee turnover or increased employee benefit costs.In addition,failure to attract,retain and develop associates from underrepresented communities can damage our business results and our reputation.Any of the foregoing can adversely affect our business.Water scarcity can adversely affect our business.We and our business partners use water in the manufacturing of our products.Water is also essential to the production of the raw materials needed in our manufacturing process.Lack of available water of acceptable quality,actions by governmental and non-governmental organizations,investors,customers and consumers on water scarcity and increasing pressure to conserve and replenish water in areas of scarcity and stress,including due to the effects of climate change,can lead to:supply chain disruption;adverse effects on our operations or the operations of our business partners;higher compliance costs;increased capital expenditures(including investments in the development of technologies to enhance water efficiency and reduce consumption);higher production costs,including less favorable pricing for water;the interruption or cessation of operations at,or relocation of,our facilities or the facilities of our business partners;failure to achieve our goals relating to water use;perception of our failure to act responsibly with respect to water use or to effectively respond to legal or regulatory requirements concerning water scarcity;or damage to our reputation,any of which can adversely affect our business.Changes in the retail landscape or in sales to any key customer can adversely affect our business.The retail landscape continues to evolve,including continued growth in e-commerce channels and hard discounters.Our business will be adversely affected if we are unable to maintain and develop successful relationships with e-commerce retailers and hard discounters,while also maintaining relationships with our key customers operating in traditional retail channels(many of whom are also focused on increasing their e-commerce sales).Our business can be adversely affected if e-commerce channels and hard discounters take significant additional market share away from traditional retailers or we fail to find ways to create increasingly better digital tools and capabilities for our retail customers to enable them to grow 14their businesses.In addition,our business can be adversely affected if we are unable to profitably expand our own direct-to-consumer e-commerce capabilities.The retail industry is also impacted by the actions and increasing power of retailers,including as a result of increased consolidation of ownership resulting in large retailers or buying groups with increased purchasing power,particularly in North America,Europe and Latin America.In this changing retail landscape,retailers and buying groups have impacted and may continue to impact our ability to compete in these jurisdictions by demanding lower prices or increased promotional programs,removing our products or otherwise reducing shelf space allocated to our products.The increasing power of retailers and consolidation also adversely impacts our smaller customers ability to compete effectively,resulting in an inability on their part to pay for our products or reduced or canceled orders of our products.Further,we must maintain mutually beneficial relationships with our key customers,including Walmart,to compete effectively.Our inability to resolve a significant dispute with any of our key customers,a change in the business condition(financial or otherwise)of any of our key customers,even if unrelated to us,a significant reduction in sales to any key customer,or the loss of any of our key customers has adversely affected and can continue to adversely affect our business.Disruption of our manufacturing operations or supply chain,including continued increased commodity,packaging,transportation,labor and other input costs,can adversely affect our business.We have experienced and could continue to experience disruption in our manufacturing operations and supply chain.Many of the raw materials and supplies used in the production of our products are sourced from countries experiencing war and other military conflict,acts of terrorism,civil unrest,political instability or unfavorable economic conditions.Natural disasters and extreme weather conditions also pose physical risks to our facilities,which could impair our production capabilities and disrupt our supply chain.Some raw materials and supplies,including packaging materials,are available only from a limited number of suppliers or from a sole supplier or are in short supply when seasonal demand is at its peak.There can be no assurance that we will be able to maintain favorable arrangements and relationships with suppliers or that our contingency plans will be effective to mitigate disruptions that may arise from shortages or discontinuation of any raw materials and other supplies that we use in the manufacture,production and distribution of our products or from operational or financial instability of our key suppliers.Any sustained or significant disruption in the future to the manufacturing or sourcing of products or materials could increase our costs and interrupt product supply,which can adversely impact our business.The raw materials and other supplies,including agricultural commodities,fuel and packaging materials,such as recycled PET,transportation,labor and other supply chain inputs that we use for the manufacturing,production and distribution of our products are subject to price volatility and fluctuations in availability caused by many factors,including changes in supply and demand,supplier capacity constraints,inflation,weather conditions(including potential effects of climate change),fire,natural disasters,disease or pests(including the impact of greening disease on the citrus industry),agricultural uncertainty,health epidemics or pandemics or other contagious outbreaks(including COVID-19),labor shortages or changes in availability of our or our business partners workforce(including the lack of availability of truck drivers as a result of COVID-19),strikes or work stoppages(including by railway workers or other third parties involved in the manufacture,production and distribution of our products),governmental incentives and controls(including import/export restrictions,such as new or increased tariffs,sanctions,quotas or trade barriers),port congestions or delays,transport capacity constraints,cybersecurity incidents or other disruptions,loss or impairment of key manufacturing sites,political uncertainties,geopolitical events,wars and other military conflicts,acts of terrorism,governmental instability or currency exchange rates.Many of our raw materials and supplies are purchased in the open market and the prices we pay for such items are subject to fluctuation.We continued to experience 15increased commodity,packaging and transportation costs during 2023,which may continue.When input prices increase unexpectedly or significantly,we may be unwilling or unable to increase our product prices or unable to effectively hedge against price increases to offset these increased costs without suffering reduced volume,revenue,margins and operating results.Political,social and geopolitical conditions can adversely affect our business.Political,social and geopolitical conditions in the markets in which our products are sold have been and could continue to be difficult to predict,resulting in adverse effects on our business.The results of elections,referendums or other political conditions(including government shutdowns),geopolitical events,wars and other military conflicts(such as the ongoing conflicts in Ukraine and the Middle East)in these markets have in the past and could continue to impact how existing laws,regulations and government programs or policies are implemented or result in uncertainty as to how such laws,regulations,programs or policies may change,including with respect to tariffs,sanctions,environmental and climate change regulations,taxes,benefit programs,the movement of goods,services and people between countries,relationships between countries,customer or consumer perception of a particular country or its government and other matters,and has resulted in and could continue to result in exchange rate fluctuation,volatility in global stock markets and global economic uncertainty or adversely affect demand for our products,any of which can adversely affect our business.In addition,political and social conditions in certain cities throughout the United States as well as globally have resulted in demonstrations and protests,including in connection with political elections,civil rights and liberties and geopolitical events.Our operations or the operations of our business partners,including the distribution of our products and the ingredients or other raw materials used in the production of our products,may be disrupted if such events persist for a prolonged period of time,including due to actions taken by governmental authorities in affected cities and regions,which can adversely affect our business.Our business can be adversely affected if we are unable to grow in developing and emerging markets.Our success depends in part on our ability to grow our business in developing and emerging markets,including Brazil,China,Mexico,Russia and South Africa.There can be no assurance that our products will be accepted or be successful in any particular developing or emerging market,due to competition,price,cultural differences,consumer preferences,regulation,method of distribution or otherwise.Our business in these markets has been and could continue in the future to be impacted by economic,political and social conditions;geopolitical conflicts,acts of war,terrorist acts,and civil unrest,including demonstrations and protests;competition;tariffs,sanctions or other regulations restricting contact with certain countries in these markets;foreign ownership restrictions;nationalization of our assets or the assets of our business partners;government-mandated closure,or threatened closure,of our operations or the operations of our business partners;restrictions on the import or export of our products or ingredients or substances used in our products;highly inflationary economies;devaluation or fluctuation or demonetization of currency;regulations on the transfer of funds to and from foreign countries,currency controls or other currency exchange restrictions,which result in significant cash balances in foreign countries,from time to time,or can significantly affect our ability to effectively manage our operations in certain of these markets and can result in the deconsolidation of such businesses;the lack of well-established or reliable legal systems;increased costs of doing business due to compliance with complex foreign and U.S.laws and regulations that apply to our international operations,including the Foreign Corrupt Practices Act,the U.K.Bribery Act and the Trade Sanctions Reform and Export Enhancement Act;and adverse consequences,such as the assessment of fines or penalties,for any failure to comply with laws and regulations.Our business can be adversely affected if we are unable to expand our business in developing and emerging markets,effectively operate,or manage the risks associated with operating,in these markets,or achieve the return on capital we expect from our investments in these markets.16Changes in economic conditions can adversely impact our business.Many of the jurisdictions in which our products are sold have experienced and could continue to experience uncertain or unfavorable economic conditions,such as high inflation and adverse changes in interest rates,tax laws or tax rates,including as a result of geopolitical events.These uncertain or unfavorable economic conditions have resulted in and could continue to result in recessions or economic slowdowns;volatile commodity markets;labor shortages;highly inflationary economies,devaluation,fluctuation or demonetization of currency;contraction in the availability of credit;austerity or stimulus measures;the effects of any default by or deterioration in the creditworthiness of the countries in which our products are sold;or a decrease in the fair value of pension or post-retirement assets that could increase future employee benefit costs and/or funding requirements of our pension or post-retirement plans.In addition,we cannot predict how current or future economic conditions will affect our business partners,including financial institutions with whom we do business,and any negative impact on any of the foregoing may also have an adverse impact on our business.Future cyber incidents and other disruptions to our information systems can adversely affect our business.We depend on information systems and technology,including public websites and cloud-based services,for many activities important to our business,including communications within our company,interfacing with customers and consumers;ordering and managing inventory;managing and operating our facilities;protecting confidential information,including personal data we collect;maintaining accurate financial records and complying with regulatory,financial reporting,legal and tax requirements.Our business has in the past and could in the future be negatively affected by system shutdowns,degraded systems performance,systems disruptions or security incidents.These disruptions or incidents may be caused by cyberattacks and other cyber incidents,network or power outages,software,equipment or telecommunications failures,the unintentional or malicious actions of employees or contractors,natural disasters,fires or other catastrophic events.In addition,the increase in certain of our employees working remotely has resulted in increased demand on our information technology infrastructure,which can be subject to failure,disruption or unavailability,and increased vulnerability to cyberattacks and other cyber incidents.Cyberattacks and other cyber incidents are occurring more frequently,the techniques used to gain access to information technology systems and data,disable or degrade service or sabotage systems are constantly evolving and becoming more sophisticated in nature and are being carried out by groups and individuals with a wide range of expertise and motives.In addition,the rapid evolution and increased adoption of artificial intelligence technologies may increase our cybersecurity risks,including generative artificial intelligence augmenting threat actors technological sophistication to enhance existing or create new malware.Cyberattacks and cyber incidents may be difficult to detect for periods of time and take many forms including cyber extortion,denial of service,social engineering,introduction of viruses or malware(such as ransomware),exploiting vulnerabilities in hardware,software or other infrastructure,hacking,website defacement or theft of passwords and other credentials,unauthorized use of computing resources for digital currency mining and business email compromise.As with other global companies,we are regularly subject to cyberattacks and other cyber incidents,including the types of attacks and incidents described above.Continued geopolitical instability has heightened the risk of cyberattacks.If we do not allocate and effectively manage the resources necessary to continue building and maintaining our information technology infrastructure,or if we fail to timely identify or appropriately respond to cyberattacks or other cyber incidents,our business has been and can continue to be adversely affected,which has resulted in and can continue to result in some or all of the following:transaction errors,processing inefficiencies,inability to access our data or systems,lost revenues or other costs resulting from disruptions or shutdowns of offices,plants,warehouses,distribution centers or other facilities,17intellectual property or other data loss,litigation,claims,legal or regulatory proceedings,inquiries or investigations,fines or penalties,remediation costs,damage to our reputation or a negative impact on employee morale and the loss of current or potential customers.In addition,these risks also exist in acquired businesses,joint ventures or companies we invest in or partner with that use separate information systems or that have not yet been fully integrated into our information systems.Similar risks exist with respect to our business partners and third-party providers,including suppliers,software and cloud-based service providers,that we rely upon for aspects of various business processes and activities,including procurement,supply chain,manufacturing,distribution,information technology support services and administrative functions(including payroll processing,health and benefit plan administration and certain finance and accounting functions)and the systems managed,hosted,provided and/or used by such third parties and their vendors.For example,malicious actors have employed and could continue to employ the information technology supply chain to introduce malware through software updates or compromised supplier accounts or hardware and exploit known or unknown hardware or software vulnerabilities in our systems or the systems of our vendors and third-party service providers.The need to coordinate with various third-party service providers,including with respect to timely notification and access to personnel and information concerning an incident,may complicate our efforts to address issues that arise.As a result,we are subject to the risk that the activities associated with our third-party service providers can adversely affect our business even if the attack or breach does not directly impact our systems or information.Although the cyber incidents and other systems disruptions that we have experienced to date have not had a material effect on our business,such incidents or disruptions could have a material adverse effect on us in the future.While we believe we devote significant resources to network security,disaster recovery,employee training and other measures to secure our information technology systems and prevent unauthorized access to or loss of data,there are no guarantees that they will be adequate to safeguard against all cyber incidents,systems disruptions,system compromises or misuses of data.In addition,while we currently maintain insurance coverage that,subject to its terms and conditions,is intended to address costs associated with certain aspects of cyber incidents and information systems failures,this insurance coverage may not,depending on the specific facts and circumstances surrounding an incident,cover all losses or all types of claims that arise from an incident,or the damage to our reputation or brands that may result from an incident.Failure to successfully complete or manage strategic transactions can adversely affect our business.We regularly review our portfolio of businesses and evaluate potential acquisitions,joint ventures,distribution agreements,divestitures,refranchisings and other strategic transactions.The success of these transactions is dependent upon,among other things,our ability to realize the full extent of the expected returns,benefits,cost savings or synergies as a result of a transaction,within the anticipated time frame,or at all;
2024-08-09
151页
5星级
FINANCIAL HIGHLIGHTSNet Sales$67,571$65,984$67,044 Consolidated Operating Profit 8,507 8,348 9,123 Segment Operating Profit 7,389 7,467 7,664 Net Earnings 6,920 5,732 6,315 Diluted Earnings Per Common ShareNet Earnings 27.55 21.66 22.76 Cash Dividends Per Common Share 12.15 11.40 10.60 Average Diluted Common Shares Outstanding 251 265 277 Cash and Cash Equivalents$1,442$2,547$3,604 Total Assets 52,456 52,880 50,873 Total Debt,net 17,459 15,547 11,676 Total Equity 6,835 9,266 10,959 Common Shares Outstanding at Year-End 240 254 271 Net Cash Provided by Operating Activities$7,920$7,802$9,221 Capital Expenditures(1,691)(1,670)(1,522)Free Cash Flow$6,229$6,132$7,699 In millions,except per share data202320222021NOTE:For additional information regarding the amounts presented above,see the Form 10-K portion of this Annual Report.A reconciliation of Segment Operating Profit to Consolidated Operating Profit is included on the page preceding the back cover of this Annual Report.2023 Annual ReportIFellow Shareholders:In 2023,Lockheed Martins 122,000 employees teamed together to further advance the boundaries of scientific discovery in support of our national defense and space exploration.We are the premier engineering and defense tech company across many disciplines from metallurgy to artificial intelligence,and the importance of our customers mission continued to be our driving force this year.Through our 21st Century Security vision,Lockheed Martin is leading the pursuit of harnessing digital technologies like 5G,AI,autonomy and distributed cloud computing for the national defense enterprise.By building strategic collaborations with industry leaders in these fields,both large and small,and adopting commercially developed technologies for defense applications,we can deliver more advanced capabilities faster and with greater value.To ensure that our internal operations fully incorporate the benefits of advanced digital technologies,we also continue to forge ahead with our One Lockheed Martin Transformation(1LMX),which is modernizing all of our core business processes and systems to increase our speed,agility and competitiveness.Together,21st Century Security and 1LMX are moving Lockheed Martin forward,and our progress is serving as a catalyst for broader transformation and innovation within the defense industrial base.In 2023,we returned to growth a year ahead of plan,and we continued our disciplined and dynamic capital allocation strategy to maximize shareholder value:James D.Taiclet Chairman,President and Chief Executive Officer2023 Financial Results$6.2billion$67.6 billion$7.4 billion10.9percentFree Cash Flow*SalesSegment Operating Profit*Segment Operating Margin*$6.9billionNet Earnings$27.55dollarsEarnings Per Share$160.6billionYear-End BacklogLockheed Martin CorporationIIProgressing Our Customers Missions With 21st Century InnovationOur companys strong performance reflects close collaboration with our customers,who recognize that geopolitical risk is elevated,technology is advancing faster than at any time in history,and that it is essential to maintain an effective deterrent to armed conflict and the capability to win,if necessary.In 2023,Lockheed Martins technologies and solutions advanced key missions for the U.S.and our allies.Advancing Air Superiority|Lockheed Martin further cemented its role as the preeminent provider of air superiority and security in 2023.The F-35 continues to be the most advanced,survivable and connected fighter in the world.It is the clear aircraft of choice for our international allies.This past year,Canada announced its purchase of 88 F-35s,we delivered the first four F-35s to Denmark,and Israel and South Korea announced they are each expanding their F-35 fleets by 25 additional aircraft.The F-16 similarly experienced global growth and interest.We delivered the first Greenville-built F-16 Block 70 aircraft to Bahrain,unveiled the first F-16 Block 70 aircraft for the Slovak Republic,and in partnership with Romania and the Netherlands,we opened a European F-16 training center in Romania.Were also continuing to lead groundbreaking aircraft innovation the X-59 experimental supersonic aircraft,built by Skunk Works and NASA,was selected as one of TIMEs“Top Inventions of 2023”in the Transportation category.Modernizing Air and Missile Defense and Precision Strike Capabilities|International demand for our integrated air and missile defense systems remains strong.This year,Switzerland and Romania each signed Letters of Offer and Acceptance for PAC-3 Missile Segment Enhancement,marking 15 partner nations for the program.We also delivered PAC-3 MSE to Poland,further strengthening NATO deterrence.Domestically,we delivered the 800th Terminal High Altitude Area Defense interceptor to the U.S.government.And to advance the U.S.Armys modernization efforts for precision strike,we delivered the first Precision Strike Missile and conducted System Qualification Tests for Extended-Range Guided Multiple Launch Rocket System,advancing the rocket toward operational testing.Lockheed Martin was also awarded contracts for Conventional Prompt Strike,the nations first surface-launched,sea-based hypersonic strike capability,and for MK21A,a new reentry vehicle.Enabling Joint All-Domain Operations|As part of the U.S.Indo-Pacific Commands Joint Fires Network at Northern Edge 2023,we demonstrated true joint force synchronization at scale by successfully integrating third-party platforms and aircraft,and performing command and control functions across all services,levels of operation and multiple domains.Internationally,the Australian Department of Defence selected Lockheed Martin for AIR6500 Phase 1.By connecting Australian systems and platforms that operate across space,air,sea,land and cyber,the AIR6500 project series will set the blueprint for future military operations across the globe.Our teams 2023 accomplishmentsRealizing Combined Joint All-Domain Command&Control2023 Annual ReportIIIPioneering Scientific Discovery in Space|We continued to develop breakthrough technologies for human advancement and technological innovation in space.The Lockheed Martin-built OSIRIS-Rex return capsule successfully landed after a seven-year mission,during which the spacecraft tagged up with asteroid Bennu.OSIRIS-REx is the first U.S.mission to return samples from an asteroid to Earth and the largest samples from anywhere beyond the Moon.Reaching New Heights in 2024Turning to 2024,we continue to focus on advancing and broadening the defense industry through 21st Century Security,while also increasing capacity in our production lines to meet sustained,increased demand for our time-tested programs of record.1LMX will be key to this effort as we look to adopt advanced manufacturing practices,digital tools and other cutting-edge technologies to streamline our internal operations and realize efficiencies.As a result,we anticipate the return to growth we experienced in 2023 to continue in 2024 and the years ahead.By keeping our programs of record sold,winning new business,and capitalizing on emerging opportunities,we have a strategy in place to responsibly grow the business and continue delivering shareholder value.Our growth would not be possible,however,without your continued support as our shareholders and without the remarkable work and dedication of our Lockheed Martin team thank you.Armed conflict happening around the world serves as a stark reminder of the value of Lockheed Martins solutions.We look forward to continuing to partner with the U.S.and our allies to enable a more safe and secure world in 2024 and beyond.James D.TaicletChairman,President and Chief Executive Officer*This letter includes references to free cash flow,segment operating profit and segment operating margin,which are non-GAAP financial measures.For reconciliations between our non-GAAP measures and the nearest GAAP measures,please refer to the page preceding the back cover of this Annual Report.As non-GAAP financial measures are not intended to be considered in isolation or as a substitute for GAAP financial measures,you should carefully read the Form 10-K included in this Annual Report,which includes our consolidated financial statements prepared in accordance with GAAP.Additionally,this letter includes statements that,to the extent they are not recitations of historical fact,constitute forward-looking statements within the meaning of the federal securities laws,and are based on Lockheed Martins current expectations and assumptions.For a discussion identifying important factors that could cause actual results to differ materially from those anticipated in the forward-looking statements,see the companys filings with the Securities and Exchange Commission,including“Managements Discussion and Analysis of Financial Condition and Results of Operations”and“Risk Factors”in the Form 10-K portion of this Annual Report.Our work to come in 2024Lockheed Martin CorporationIVBOARD OF DIRECTORSEXECUTIVE OFFICERSCORPORATE DIRECTORYAs of March 1,2024James D.TaicletChairman,President and Chief Executive OfficerLockheed Martin Corporation Daniel F.AkersonRetired Chairman andChief Executive OfficerGeneral Motors CompanyDavid B.BurrittPresident and Chief Executive OfficerUnited States Steel CorporationBruce A.CarlsonRetired General United States Air ForceJohn M.DonovanRetired Chief Executive OfficerAT&T Communications,LLCJoseph F.Dunford,Jr.Senior Managing Director and Partner Liberty Strategic Capital and Retired General United States Marine CorpsJames O.Ellis,Jr.Retired President andChief Executive OfficerInstitute of Nuclear PowerOperationsThomas J.FalkRetired Chairman and Chief Executive OfficerKimberly-Clark CorporationIlene S.GordonRetired Chairman and Chief Executive OfficerIngredion IncorporatedVicki A.HollubPresident and Chief Executive OfficerOccidental Petroleum CorporationJeh C.JohnsonPartner Paul,Weiss,Rifkind,Wharton&Garrison LLP andFormer Secretary of Homeland SecurityDebra L.Reed-KlagesRetired Chairman,President and Chief Executive OfficerSempra EnergyPatricia E.YarringtonRetired Chief Financial OfficerChevron CorporationJames D.TaicletChairman,President and Chief Executive Officer Timothy S.CahillPresident,Missiles and Fire ControlStephanie C.HillPresident,Rotary and Mission SystemsMaryanne R.LavanSenior Vice President,General Counsel andCorporate Secretary Robert M.LightfootPresident,Space Jesus MalaveChief Financial OfficerH.Edward PaulVice President and ControllerMaria A.RicciardoneVice President,Treasurer and Investor Relations Frank A.St.John Chief Operating Officer Gregory M.Ulmer President,AeronauticsUNITED STATESSECURITIES AND EXCHANGE COMMISSIONWashington,D.C.20549FORM 10-K(Mark One)ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)OF THE SECURITIES EXCHANGE ACT OF 1934For the fiscal year ended December 31,2023 or TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)OF THE SECURITIES EXCHANGE ACT OF 1934For the transition period from _ to _Commission file number 1-11437LOCKHEED MARTIN CORPORATION(Exact name of registrant as specified in its charter)Maryland52-1893632(State or other jurisdiction ofincorporation or organization)(I.R.S.Employer Identification No.)6801 Rockledge Drive,Bethesda,Maryland20817(Address of principal executive offices)(Zip Code)(301)897-6000(Registrants telephone number,including area code)Securities registered pursuant to Section 12(b)of the Act:Title of each classTrading Symbol(s)Name of each exchange on which registeredCommon Stock,$1 par valueLMTNew York Stock ExchangeSecurities registered pursuant to Section 12(g)of the Act:NoneIndicate by check mark if the registrant is a well-known seasoned issuer,as defined in Rule 405 of the Securities Act.Yes No Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d)of the Act.Yes No 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 No Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T(232.405 of this chapter)during the preceding 12 months(or for such shorter period that the registrant was required to submit such files).Yes No Indicate by check mark whether the registrant is a large accelerated filer,an accelerated filer,a non-accelerated filer,a smaller reporting company,or an emerging growth company.See the definitions of“large accelerated filer,”“accelerated filer,”“smaller reporting company,”and“emerging growth company”in Rule 12b-2 of the Exchange Act.Large accelerated filer Accelerated filer Nonaccelerated filer Smaller reporting company Emerging growth company If an emerging growth company,indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a)of the Exchange Act.Indicate by check mark whether the registrant has filed a report on and attestation to its managements assessment of the effectiveness of its internal control over financial reporting under Section 404(b)of the Sarbanes-Oxley Act(15 U.S.C.7262(b)by the registered public accounting firm that prepared or issued its audit report.If securities are registered pursuant to Section 12(b)of the Act,indicate by check mark whether the financial statements of the registrant included in the filing reflect the correction of an error to previously issued financial statements.Indicate by check mark whether any of those error corrections are restatements that required a recovery analysis of incentive-based compensation received by any of the registrants executive officers during the relevant recovery period pursuant to 240.10D-1(b).Indicate by check mark whether the registrant is a shell company(as defined in Rule 12b-2 of the Exchange Act).Yes No The aggregate market value of voting and non-voting common stock held by non-affiliates of the registrant computed by reference to the last sales price of such stock,as of the last business day of the registrants most recently completed second fiscal quarter,which was June 23,2023,was approximately$115.2 billion.There were 241,643,304 shares of our common stock,$1 par value per share,outstanding as of January 19,2024.DOCUMENTS INCORPORATED BY REFERENCEPortions of Lockheed Martin Corporations 2024 Definitive Proxy Statement are incorporated by reference into Part III of this Form 10-K.The 2024Definitive Proxy Statement will be filed with the Securities and Exchange Commission within 120 days after the end of the fiscal year to which this reportrelates.Lockheed Martin CorporationForm 10-KFor the Year Ended December 31,2023Table of ContentsPART IPage ITEM 1.Business.3ITEM 1A.Risk Factors.10ITEM 1B.Unresolved Staff Comments.22ITEM 1C.Cybersecurity.22ITEM 2.Properties.24ITEM 3.Legal Proceedings.24ITEM 4.Mine Safety Disclosures.24ITEM 4(a).Information about our Executive Officers.25PART IIITEM 5.Market for Registrants Common Equity,Related Stockholder Matters and Issuer Purchases of Equity Securities.27ITEM 6.Reserved.28ITEM 7.Managements Discussion and Analysis of Financial Condition and Results of Operations.29ITEM 7A.Quantitative and Qualitative Disclosures About Market Risk.52ITEM 8.Financial Statements and Supplementary Data.53ITEM 9.Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.97ITEM 9A.Controls and Procedures.97ITEM 9B.Other Information.99ITEM 9C.Disclosure Regarding Foreign Jurisdictions that Prevent Inspections.99PART IIIITEM 10.Directors,Executive Officers and Corporate Governance.99ITEM 11.Executive Compensation.99ITEM 12.Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.100ITEM 13.Certain Relationships and Related Transactions,and Director Independence.100ITEM 14.Principal Accounting Fees and Services.100PART IVITEM 15.Exhibits and Financial Statement Schedules.101ITEM 16.Form 10-K Summary.104SIGNATURES.105PART IITEM 1.BusinessGeneralWe are a global security and aerospace company principally engaged in the research,design,development,manufacture,integration and sustainment of advanced technology systems,products and services.We also provide a broad range of management,engineering,technical,scientific,logistics,system integration and cybersecurity services.Our main areas of focus are in defense,space,intelligence,homeland security and information technology,including cybersecurity.We serve both U.S.and international customers with products and services that have defense,civil and commercial applications,with our principal customers being agencies of the U.S.Government.We operate in a complex and evolving global security environment.Our strategy consists of the design and development of platforms and systems that meet the current needs of our customers and the future requirements of 21st Century Security.Our vision for 21st Century Security is to accelerate the adoption of advanced networking and leading-edge technologies into our national defense enterprise,while enhancing the performance and value of our platforms and products for our customers.The aim of 21st Century Security is to integrate new and existing systems across all domains with advanced,open-architecture networking and operational technologies to make defense forces more agile,adaptive and unpredictable.Twenty-first Century Security is an overarching vision that guides our investment and strategy.We are also focused on four elements for potential growth in the near to mid-term:current programs of record,classified programs,hypersonics and new awards.We have multiple programs of record from each business segment that are entering growth stages,including the F-35 sustainment activity(Aeronautics);increased Patriot Advanced Capability-3(PAC-3)production rates and increased demand for High Mobility Artillery Rocket System(HIMARS)and Guided Multiple Launch Rocket Systems(GMLRS)(Missiles and Fire Control);radar surveillance systems and CH-53K King Stallion heavy lift helicopter(Rotary and Mission Systems);and the modernization and enhancements to the Trident II D5 Fleet Ballistic Missile(FBM)(Space).We are engaged in significant classified development programs and pending successful achievement of the objectives within those programs,we expect to begin the transition from development to production over the next few years.We are currently performing on multiple hypersonics programs and following the successful completion of ongoing testing and evaluation activity,multiple programs are expected to enter early production phases through 2026.Finally,we are always in pursuit of new program awards to develop future platforms that enable us to continue to place security capability into the market and expand our global reach.Key to enabling success of our strategy is developing differentiating technologies,forging strategic partnerships,including with commercial companies,executing on our multi-year business transformation initiative to enhance our digital infrastructure and increase efficiencies and collaboration throughout our business and maintaining fiscal discipline.Underpinning our ability to execute our strategy is our talent and culture.We invest substantially in our people to ensure that our workforce has the technical skills necessary to succeed,and we expect to continue to invest internally in innovative technologies that address rapidly evolving mission requirements for our customers.We also will continue to evaluate our portfolio and will make strategic acquisitions or divestitures,as appropriate,while deepening our connection to commercial industry through cooperative partnerships,joint ventures and equity investments.Business SegmentsWe operate in four business segments:Aeronautics,Missiles and Fire Control(MFC),Rotary and Mission Systems(RMS)and Space.We organize our business segments based on the nature of the products and services offered.AeronauticsAeronautics is engaged in the research,design,development,manufacture,integration,sustainment,support and upgrade of advanced military aircraft,including combat and air mobility aircraft,unmanned air vehicles and related technologies.Aeronautics also has contracts with the U.S.Government for various classified programs.Aeronautics major programs include:F-35 Lightning II-international multi-role,multi-variant,fifth generation stealth fighter;C-130 Hercules-international tactical airlifter;F-16 Fighting Falcon-combat-proven,international multi-role fighter;andF-22 Raptor-air dominance and multi-role fifth generation stealth fighter.The F-35 program is our largest program,generating 26%of our total consolidated net sales,as well as 64%of Aeronautics net sales in 2023.The F-35 program consists of multiple development,production and sustainment contracts.Development is focused on modernization of F-35s capability and addressing emerging threats.Sustainment provides logistics 3and training support for the aircraft delivered to F-35 customers.For additional information on the F-35 program,see“Status of the F-35 Program”in Managements Discussion and Analysis of Financial Condition and Results of Operations.See also Item 1A-Risk Factors for a discussion of risks related to the F-35 program.In addition to the aircraft programs above,Aeronautics is involved in advanced development programs incorporating innovative design and rapid prototype applications.Our Advanced Development Programs(ADP)organization,also known as Skunk Works,is focused on future systems,including unmanned and manned aerial systems and next generation capabilities for air dominance,hypersonics,intelligence,surveillance,reconnaissance,situational awareness and air mobility.We continue to explore technology advancement and insertion into our existing aircraft.We also are involved in numerous network-enabled activities that allow separate systems to work together to increase effectiveness and we continue to invest in new technologies to maintain and enhance competitiveness in military aircraft design,development and production.Missiles and Fire ControlMFC provides air and missile defense systems;tactical missiles and air-to-ground precision strike weapon systems;logistics;fire control systems;mission operations support,readiness,engineering support and integration services;manned and unmanned ground vehicles;and energy management solutions.MFC also has contracts with the U.S.Government for various classified programs.MFCs major programs include:The Patriot Advanced Capability-3(PAC-3)and Terminal High Altitude Area Defense(THAAD)air and missile defense programs.PAC-3 is an advanced defensive missile for the U.S.Army and international customers designed to intercept and eliminate incoming airborne threats using kinetic energy.THAAD is a transportable defensive missile system for the U.S.Government and international customers designed to engage targets both within and outside of the Earths atmosphere.The Multiple Launch Rocket System(MLRS),Precision Strike Missile(PrSM),Joint Air-to-Surface Standoff Missile(JASSM),Long Range Anti-Ship Missile(LRASM),and Hellfire tactical and strike missile programs.MLRS is a highly mobile,automatic system that fires surface-to-surface rockets and missiles from the M270 and High Mobility Artillery Rocket System(HIMARS)platforms produced for the U.S.Army and international customers and PrSM is the next generation of precision strike surface-to-surface weapon systems that is compatible with the MLRS family of launchers in support of the U.S.Army.JASSM is an air-to-ground missile launched from fixed-wing aircraft,which is produced for the U.S.Air Force and international customers.LRASM is a precision guided anti-ship missile derived from JASSM and designed to interdict a variety of surface threats at very long range and produced for the U.S.Air Force,U.S.Navy,and international customers.Hellfire is an air-to-ground missile used on rotary and fixed-wing aircraft,which is produced for the U.S.Army,Navy,Marine Corps and international customers.The Apache fire control system,Sniper Advanced Targeting Pod(SNIPER)and Infrared Search and Track(IRST21)sensors and global sustainment programs.The Apache fire control system provides weapons-targeting capability for the Apache helicopter for the U.S.Army and international customers.SNIPER is a targeting system for several fixed-wing aircraft and is produced for the U.S.Air Force and international customers.IRST21 provides long-range infrared detection and tracking of airborne threats and is used on several fixed-wing aircraft.IRST21 is produced for the U.S.Air Force,the U.S.Navy,the National Guard and international customers.The Special Operations Forces Global Logistics Support Services(SOF GLSS)program,which provides logistics support services to the special operations forces of the U.S.military.Hypersonics programs,which include several programs with the U.S.Air Force and U.S.Army to design,develop and build hypersonic strike weapons.The Javelin program,which is a one-person portable and platform-employable anti-tank and multi-target precision weapon system.Javelin was developed and is currently produced for the U.S.Army and U.S.Marine Corps by a joint venture between Lockheed Martin and RTX Corporation.Rotary and Mission SystemsRMS designs,manufactures,services and supports various military and commercial helicopters,surface ships,sea and land-based missile defense systems,radar systems,laser systems,sea and air-based mission and combat systems,command and control mission solutions,cyber solutions,and simulation and training solutions.RMS also has contracts with the U.S.Government for various classified programs.RMS major programs include:Sikorsky helicopter programs such as those related to the BLACK HAWK,Seahawk and CH-53K King Stallion heavy lift helicopters which are in service with U.S.and foreign governments,the Combat Rescue Helicopter(CRH)utilized by the U.S.Air Force,and the VH-92A helicopter for the U.S.Marine One transport mission.Integrated warfare systems and sensors(IWSS)programs such as Aegis Combat System(Aegis)programs that serve as an air and missile defense system for the U.S.Navy and international customers and is also a sea and land-based element of the U.S.missile defense system,and the Littoral Combat Ship(LCS)and Multi-Mission Surface Combatant(MMSC)4programs to provide surface combatant ships for the U.S.Navy and international customers that are designed to operate in shallow waters and the open ocean.Command,control,communications,computers,cyber,combat systems,intelligence,surveillance,and reconnaissance(C6ISR)programs such as the Command,Control,Battle Management and Communications(C2BMC)program to provide an air operations center for the Ballistic Missile Defense System for the U.S.Government,undersea combat systems programs largely serving the U.S.Navy,and Australias Joint Air Battle Management System(AIR 6500).Training and logistics solutions(TLS)programs such as those providing sustainment services and programs that provide simulators and associated training to U.S.military and foreign government customers.SpaceSpace is engaged in the research and design,development,engineering and production of satellites,space transportation systems,and strategic,advanced strike,and defensive systems.Space provides network-enabled situational awareness and integrates complex space and ground global systems to help our customers gather,analyze and securely distribute critical intelligence data.Space is also responsible for various classified systems and services in support of vital national security systems.Spaces major programs include:The Next Generation Overhead Persistent Infrared(Next Gen OPIR)system,which provides the U.S.Space Force with enhanced worldwide missile warning capabilities.The Trident II D5 Fleet Ballistic Missile(FBM),a program with the U.S.Navy for the only submarine-launched intercontinental ballistic missile currently in production in the U.S.The Orion Multi-Purpose Crew Vehicle(Orion),a spacecraft for NASA utilizing new technology for human exploration missions beyond low earth orbit.Next Generation Interceptor(NGI),a program with the Missile Defense Agency(MDA)utilizing next generation propulsion and sensors to provide homeland missile defense.Global Positioning System(GPS)III,a program to modernize the GPS satellite system for the U.S.Space Force.Hypersonics programs,which include several programs with the U.S.Army and U.S.Navy to design,develop and build hypersonic strike weapons.The Transport Layer program,a small satellite program designed to support resilient space communications for the Space Development Agency.Intellectual PropertyWe routinely apply for and own a substantial number of U.S.and foreign patents and trademarks related to the products and services we provide.We also develop and own other intellectual property,including copyrights,trade secrets and research,development and engineering know-how,that contributes significantly to our business.In addition,we license intellectual property to and from third parties.The Federal Acquisition Regulation(FAR)and Defense Federal Acquisition Regulation Supplement(DFARS)provide the U.S.Government certain rights in intellectual property,including patents,developed by us and our subcontractors and suppliers in performance of government contracts or with government funding.The U.S.Government may use or authorize others,including competitors,to use such intellectual property.See the discussion of matters related to our intellectual property in Item 1A-Risk Factors.Non-U.S.governments also may have certain rights in patents and other intellectual property developed in performance of our contracts for them.Although our intellectual property rights in the aggregate are important to the operation of our business,we do not believe that any existing patent,license or other intellectual property right is of such importance that its loss or termination would have a material adverse effect on our business taken as a whole.Research and DevelopmentWe conduct research and development(R&D)activities using our own funds(referred to as company-funded R&D or independent research and development(IR&D)and under contractual arrangements with our customers(referred to as customer-funded R&D)to enhance existing products and services and to develop future technologies.R&D costs include basic research,applied research,concept formulation studies,design,development,and related test activities.See“Note 1 Organization and Significant Accounting Policies”(under the caption“Research and development and similar costs”)included in our Notes to Consolidated Financial Statements.Raw Materials,Suppliers and SeasonalitySome of our products require relatively scarce raw materials,such as rare earth minerals.Other important materials and components,on which certain of our products rely,include aluminum,titanium,carbon fiber and advanced microelectronics,such as semiconductors.We rely on other companies to provide materials,components and products and to perform a portion of 5the services that are provided to our customers under the terms of most of our contracts.Although long-term agreements have historically helped enable a continued supply of these materials,the lingering effects of the COVID-19 pandemic,supply chain challenges,supplier disputes,regulatory restrictions,and inflationary pressures have caused certain parts shortages,extended lead times and pricing escalations affecting certain sources of supply.We continue working to minimize the impact of supply chain challenges on us but many of the challenges are industry wide or caused by geopolitical events and general economic conditions that are outside of our control.These supplier disruptions have resulted in delays and increased costs and have adversely affected our program performance and operating results.These dynamics are expected to continue in 2024.For more information on the risks related to our suppliers and raw materials,see Item 1A-Risk Factors.No material portion of our business is considered to be seasonal.Various factors,however,can affect the distribution of our sales between accounting periods,including the timing of government awards,the availability of government funding,product deliveries and customer acceptance.Human Capital ResourcesDue to the specialized nature of our business,our performance depends on identifying,attracting,developing,motivating and retaining a highly skilled workforce with the requisite skills and,in many cases,security clearances,in multiple areas,including engineering,science,manufacturing,information technology,cybersecurity,business development and strategy and management.Our human capital management strategy,which we refer to as our people strategy,is tightly aligned with our business needs and technology strategy.During 2023,our human capital efforts were focused on continuing to accelerate the transformation of our technology for workforce management through investments in upgraded systems and processes.We also focused on increasing our ability to meet the quickly changing needs of the business,all while maintaining a respectful,supportive and inclusive working environment and culture.We use a variety of human capital measures in managing our business,including:workforce demographics and metrics in relation to representation,attrition,hiring,promotions and leadership;and talent management metrics,including retention rates of top talent.Workforce DemographicsAs of December 31,2023,we had a highly skilled workforce made up of approximately 122,000 employees,including approximately 65,000 engineers,scientists and information technology professionals.As of December 31,2023,approximately 93%of our workforce was located in the U.S.and approximately 19%of our employees were covered by collective bargaining agreements with various unions.A number of our existing collective bargaining agreements expire in any given year.Historically,we have been successful in renegotiating expiring agreements without any material disruption of operating activities,and management considers employee and union relations to be good.This has continued to be the case in 2023.Diversity and Inclusion Diversity and inclusion is a business imperative for us,as we believe that it is key to our future success.We have focused our diversity and inclusion initiatives on employee recruitment,including active engagement and outreach with minority-serving institutions,employee training and development,such as efforts focused on expanding the diverse talent pipeline,and employee engagement,including through participation in our Business Resource Groups.Our Business Resource Groups are voluntary,employee-led groups that are open to all employees while being aligned to demographic categories that we annually report on to the U.S.Government,including race/ethnicity,gender,disability and veteran status.The categories have been expanded to gain a deeper understanding of our workforce to include military service,sexual-orientation and gender identity which are not part of our annual government submission.The Business Resource Groups foster a diverse and inclusive workplace aligned with our organizational mission,values,goals and business practices and drive awareness and change within our organization.Through these and other focused efforts,including workforce availability,we have improved the diversity of our overall U.S.workforce and within leadership positions,specifically in the representation of women,people of color and people with disabilities.Additionally,veteran representation in our workforce remains outstanding,at almost four times the current annual national percentage of veterans in the civilian workforce.Employee Profile(as of December 31,2023):Women(a)People of Color(a)Veterans(a)People with Disabilities(a)Overall232!%Executives(b)25!%(a)Based on employees who self-identify.Includes only U.S.employees and expatriates except for data relating to women,which also includes local country nationals.Excludes casual workers,interns/co-ops and employees of certain subsidiaries and joint ventures.(b)Executive is defined as director-level(one level below vice president)or higher.6Talent Acquisition,Retention and DevelopmentWe strive to hire,develop and retain the top talent in the industry.During 2023,we hired nearly 15,000 employees.An integral part of our people strategy is early career hiring through college and intern pipelines,particularly in technical fields and critical skills areas.During the 2022-2023 academic year,we hired a record 6,000 college hires and interns.In addition to efforts focused on recruitment,we also monitor employee attrition across a broad array of categories and segments of the population,including with respect to diversity and top talent.Critical to attracting and retaining top talent is employee satisfaction,and we regularly conduct employee engagement surveys to gauge employee satisfaction and to understand the effectiveness of our people strategy and assess employees intent to stay.We attract and reward our employees by providing market competitive compensation and benefits,including incentives and recognition plans that extend to non-represented employees of all levels in our organization and encourage excellence through our pay-for-performance philosophy.We have a hybrid workforce model that encourages flexible working arrangements for employees and teams who can meet our customer commitments remotely,which has helped recruit and retain talent.In addition,we invest in the development of our employees through training,apprenticeship programs,security clearance sponsorship,leadership development plans and offering tuition assistance programs for continuing education or industry certifications.We believe this employee development makes us more competitive and also assists with leadership succession planning throughout the corporation.Employee Safety and HealthThrough our safety and health program we seek to optimize our operations with targeted safety,health and wellness opportunities designed to provide safe work conditions,and a healthy work environment,promote workforce resiliency and enhance business value.As part of this program,we track employee health and safety measures,including quarterly and yearly targets related to the number of injury and illness incidents that occur at work,those incidents that result in days lost,and the number of days lost due to workplace injuries and illness.For information on the risks related to our human capital resources,see Item 1A-Risk Factors.CompetitionWe compete with many different companies in the defense and aerospace industry.The Boeing Company,General Dynamics,L3Harris Technologies,Northrop Grumman,and RTX Corporation are some of our primary competitors.Key characteristics of our industry include long operating cycles and intense competition,which is evident through the number of competitors bidding on program opportunities and the existence of bid protests(competitor protests of U.S.Government procurement awards).We often collaborate with our competitors through teaming arrangements in efforts to provide our customers with the best mix of capabilities to address specific requirements.Additionally,a company competing to be a prime contractor may,upon ultimate award of the contract to another competitor,serve as a subcontractor to the ultimate prime contracting company.It is not unusual to compete for a contract award with a peer company and,simultaneously,perform as a supplier to or a customer of that same competitor on other contracts.Our broad portfolio of products and services competes domestically and internationally against products and services of the companies listed above,numerous smaller competitors and startups,and increasingly,non-traditional and non-U.S.defense contractors.In some areas of our business,customer requirements are changing to encourage or facilitate expanded competition.Principal factors of competition include:the technical excellence,reliability,safety and cost competitiveness of our products and services to the customer;technical and management capability;the ability to innovate and develop new products and technologies that improve mission performance and adapt to dynamic threats;successful program execution and on-time delivery of complex,integrated systems;the reputation and customer confidence derived from past performance;our demonstrated ability to execute and perform against contract requirements and successfully manage customer relationships;and our global footprint and accessibility to customers.The competition for international sales for most of our products and services is subject to U.S.Government stipulations(e.g.,export restrictions,market access,technology transfer,industrial cooperation and contracting practices).We compete against U.S.and non-U.S.companies(or teams)for contract awards by international governments.International competitions are also subject to different laws or contracting practices of international governments,which affects how we structure our bid for the procurement.In many international procurements,the purchasing governments relationship with the U.S.and its industrial cooperation programs designed to enhance local industry are important factors in determining the outcome of a competition.It is common for international customers to require contractors to comply with their industrial cooperation regulations,sometimes referred to as offset requirements,and we have entered into foreign offset agreements as part of securing 7some international business.For more information concerning our international business,see“International Business”in Managements Discussion and Analysis of Financial Condition and Results of Operations and Item 1A-Risk Factors.Technological advances in such areas as additive manufacturing,data analytics,digital engineering,artificial intelligence,advanced materials,autonomy and robotics,and new business models such as commercial access to space,are enabling new factors of competition for both traditional and non-traditional competitors.Regulatory MattersOur business is heavily regulated.We contract with numerous U.S.Government agencies and entities,principally all branches of the U.S.military and NASA.We also contract with similar government authorities in other countries,either under the foreign military sales(FMS)program,contracted through the U.S.Government,or as a direct sale with the foreign government authority,which regulates these sales in a manner similar to the U.S.Government.Government ContractsWe must comply with,and are affected by,laws and regulations relating to the formation,administration and performance of U.S.Government and other governments contracts,including foreign governments.These laws and regulations,among other things:require certification and disclosure of all cost or pricing data in connection with certain types of contract negotiations;impose specific and unique cost accounting practices that may differ from U.S.generally accepted accounting principles(GAAP);impose acquisition regulations,which may change or be replaced over time,that define which costs can be charged to the U.S.Government,how and when costs can be charged,and otherwise govern our right to reimbursement under certain U.S.Government and foreign contracts;require specific security controls to protect U.S.Government controlled unclassified information and that our suppliers that have access to this type of information comply with cyber security regulations;restrict the use and dissemination of information classified for national security purposes and the export of certain products,services and technical data;prohibit the acquisition from or use by contractors of materials,products or services procured from certain countries or entities located outside the United States(e.g.,the prohibition on the acquisition of sensitive materials from non-allied foreign nations and prohibition on the acquisition and use of certain telecommunications and video surveillance services or equipment);andrequire the review and approval of contractor business systems,including accounting systems,estimating systems,earned value management systems for managing cost and schedule performance on certain complex programs,purchasing systems,material management and accounting systems for planning,controlling and accounting for the acquisition,use,issuing and disposition of material,and property management systems.The U.S.Government and in limited cases certain other governments may terminate any of our government contracts and subcontracts either at their convenience or for default based on our performance.If a contract is terminated for convenience,we generally are protected by provisions covering reimbursement for costs incurred on the contract and profit on those costs.If a contract is terminated for default,we generally are entitled to payment for our work that has been accepted by the U.S.Government or other governments;however,the U.S.Government and other governments could make claims to reduce our recovery or recoup its procurement costs and could assess other special penalties.For more information regarding the U.S.Governments and other governments right to terminate our contracts and the risks of doing work internationally,see Item 1A-Risk Factors.For more information regarding government contracting laws and regulations,see Item 1A-Risk Factors as well as“Critical Accounting Policies-Contract Accounting/Sales Recognition”in Managements Discussion and Analysis of Financial Condition and Results of Operations.Additionally,our programs for the U.S.Government often operate for periods of time under undefinitized contract actions(UCAs),which means that we begin performing our obligations before the terms,specifications or price are finally agreed to between the parties.Although in most cases we historically have reached mutual agreement to definitize our UCAs,the U.S.Government has the ability to unilaterally definitize contracts and has done so in the past.Absent a successful appeal of such action,the unilateral definitization of the contract obligates us to perform under terms and conditions imposed by the U.S.Government.The U.S.Governments power to unilaterally definitize a contract can affect our ability to negotiate mutually agreeable contract terms and,if a contract is unilaterally imposed upon us,it may negatively affect our expected profit and cash flows on a program or impose burdensome terms.8Classified ContractsA portion of our business is classified by the U.S.Government and cannot be specifically described.The operating results of classified contracts are included in our consolidated financial statements.The business risks and capital requirements associated with classified contracts historically have not differed materially from those of our other U.S.Government contracts.However,under certain classified fixed price development and production contracts,we are unable to insure risk of loss to government property because of the classified nature of the contracts and the inability to disclose classified information necessary for underwriting and claims to commercial insurers.Our internal controls addressing the financial reporting of classified contracts are consistent with our internal controls for our non-classified contracts.Commercial AircraftOur commercial aircraft products are required to comply with U.S.and international regulations governing production and quality systems,airworthiness and installation approvals,repair procedures and continuing operational safety.EnvironmentalOur operations are subject to and affected by various federal,state,local and foreign environmental protection laws and regulations regarding the discharge of materials into the environment or otherwise regulating the protection of the environment.As a result of these environmental protection laws,we are involved in environmental remediation at some of our current and former facilities and at third-party-owned sites where we have been designated a potentially responsible party as a result of our prior activities and those of our predecessor companies.Although the extent of our financial exposure cannot in all cases be reasonably estimated,the costs of environmental compliance have not had,and we do not expect that these costs will have,a material adverse effect on our earnings,financial position and cash flow,primarily because substantially all of our environmental costs are allowable in establishing the price of our products and services under our contracts with the U.S.Government.For information regarding these matters,including current estimates of the amounts that we believe are required for remediation or cleanup to the extent that they are probable and estimable,see“Critical Accounting Policies-Environmental Matters”in Managements Discussion and Analysis of Financial Condition and Results of Operations and“Note 14 Legal Proceedings,Commitments and Contingencies”included in our Notes to Consolidated Financial Statements.See also the discussion of environmental matters in Item 1A-Risk Factors.Climate and Sustainability Reporting and Regulation There is an increasing global regulatory focus on greenhouse gas(GHG)emissions and their potential impacts relating to climate change.Various jurisdictions around the world in which we operate,including the U.S.,the European Union,the United Kingdom,Australia and certain U.S.States,have adopted or proposed laws related to climate and sustainability reporting.These and future laws,regulations or policies in response to concerns over GHG emissions such as carbon taxes,mandatory reporting and disclosure obligations,including environmental requirements for certain federal contractors and subcontractors and the SECs proposed climate-related disclosure rule,and changes in procurement policies,including the use of environmental goals in proposal evaluation,could significantly increase our operational and compliance burdens and costs.We monitor developments in climate-change related regulation for their potential effect on us and also have a comprehensive sustainability program that seeks to mitigate our impact on the environment,including targets to reduce our GHG emissions.For more information on the risk of climate-change related regulation,see Item 1A-Risk Factors.Other Applicable RegulationsOur businesses and operations are subject to both U.S.and non-U.S.government laws,regulations and procurement policies and practices,including regulations relating to product testing,import-export controls,technology transfer restrictions,foreign investment,tariffs,taxation,repatriation of earnings,sanctions,exchange controls,the Foreign Corrupt Practices Act and other anti-corruption laws and anti-boycott provisions of the U.S.Export Control Reform Act of 2018.Available InformationWe are a Maryland corporation formed in 1995 by combining the businesses of Lockheed Corporation and Martin Marietta Corporation.Our principal executive offices are located at 6801 Rockledge Drive,Bethesda,Maryland 20817.Our telephone number is(301)897-6000 and our website address is .We make our website content available for information purposes only.It should not be relied upon for investment purposes,nor is it incorporated by reference into this Annual Report on Form 10-K(Form 10-K).9Throughout this Form 10-K,we incorporate by reference information from parts of other documents filed with the U.S.Securities and Exchange Commission(SEC).The SEC allows us to disclose important information by referring to it in this manner.Our annual reports on Form 10-K,quarterly reports on Form 10-Q,current reports on Form 8-K,proxy statements for our annual stockholders meetings and amendments to those reports are available free of charge on our website, soon as reasonably practical after we electronically file the material with,or furnish it to,the SEC.In addition,copies of our annual report will be made available,free of charge,upon written request.The SEC also maintains a website at www.sec.gov that contains reports,proxy statements and other information regarding SEC registrants,including Lockheed Martin Corporation.Forward-Looking StatementsThis Form 10-K contains statements that,to the extent they are not recitations of historical fact,constitute forward-looking statements within the meaning of the federal securities laws and are based on our current expectations and assumptions.The words“believe,”“estimate,”“anticipate,”“project,”“intend,”“expect,”“plan,”“outlook,”“scheduled,”“forecast”and similar expressions are intended to identify forward-looking statements.These statements are not guarantees of future performance and are subject to risks and uncertainties.Statements and assumptions with respect to future sales,income and cash flows,growth,program performance,the outcome of litigation,anticipated pension cost and funding,environmental remediation cost estimates,planned acquisitions or dispositions of assets,or the anticipated consequences are examples of forward-looking statements.Numerous factors,including the risk factors described in the following section,could cause our actual results to differ materially from those expressed in our forward-looking statements.Our actual financial results likely will be different from any projections due to the inherent nature of projections.Given these uncertainties,forward-looking statements should not be relied on in making investment decisions.The forward-looking statements contained in this Form 10-K speak only as of the date of its filing.Except where required by applicable law,we expressly disclaim a duty to provide updates to forward-looking statements after the date of this Form 10-K to reflect subsequent events,changed circumstances,changes in expectations,or the estimates and assumptions associated with them.The forward-looking statements in this Form 10-K are intended to be subject to the safe harbor protection provided by the federal securities laws.ITEM 1A.Risk FactorsAn investment in our common stock or debt securities involves risks and uncertainties.While we seek to identify,manage and mitigate risks to our business,risk and uncertainty cannot be eliminated or necessarily predicted.The outcome of one or more of these risks could have a material effect on our operating results,financial position,or cash flows.You should carefully consider the following factors,in addition to the other information contained in this Annual Report on Form 10-K,before deciding to trade in our common stock or debt securities.Risks Related to our Reliance on Government Contracts,our Industry and the EconomyWe depend heavily on contracts with the U.S.Government for a substantial portion of our business.Changes in the U.S.Governments priorities,or delays or reductions in spending could have a material adverse effect on our business.We derived 73%of our total consolidated net sales from the U.S.Government in 2023,including 64%from the Department of Defense(DoD).We expect to continue to derive most of our sales from work performed under U.S.Government contracts.A reduction in overall U.S.defense spending,on an absolute or inflation-adjusted basis,because of shifting priorities,budget compromises or otherwise could adversely affect our business.Budget uncertainty,the potential for U.S.Government shutdowns,the use of continuing resolutions,and the federal debt ceiling can adversely affect our industry and the funding for our programs.If appropriations are delayed or a government shutdown were to occur and continue for an extended period of time,we could be at risk of reduced orders,program cancellations and other disruptions and nonpayment.When the U.S.Government operates under a continuing resolution,new contract and program starts are restricted and funding for our programs may be unavailable,reduced or delayed.Our contracts with the U.S.Government are conditioned upon the continuing availability of Congressional appropriations.Congress usually appropriates funds on a fiscal year(FY)basis even though contract performance may extend over many years.Consequently,contracts are often partially funded initially,and additional funds are committed only as Congress makes further appropriations over time.To the extent we incur costs in excess of funds obligated on a contract or in advance of a contract 10award or contract definitization,we are at risk of not being reimbursed for those costs unless and until additional funds are obligated under the contract or the contract is successfully awarded,definitized and funded,which could adversely affect our results of operations,financial condition and cash flows.Failure to fund or the termination of significant programs or contracts by the U.S.Government could adversely affect our business and financial performance.DoDs changes in funding priorities also could reduce opportunities in existing programs and in future programs or initiatives where we intend to compete and where we have made investments.While we would expect to compete and be well positioned as the incumbent on existing programs,we may not be successful and,even if we are successful,the replacement programs may be funded at lower levels or result in lower margins.In addition,our ability to grow in key areas such as hypersonics programs,classified programs and next-generation franchise programs will be affected by the overall budget environment and whether development programs transition to production and the timing of such transition,all of which are dependent on U.S.Government authorization and funding.The F-35 program comprises a material portion of our revenue and reductions or delays in funding for this program and risks related to performance,schedule,cost and requirements of the program could adversely affect our performance.The F-35 program,which consists of multiple development,production and sustainment contracts,is our largest program and represented 26%of our total consolidated net sales in 2023.A decision by the U.S.Government,international partners,or FMS customer countries to cut spending on this program or reduce or delay planned orders would have an adverse impact on our business and results of operations.Given the size and complexity of the F-35 program,we anticipate that there will be continual reviews related to aircraft performance,program and delivery schedule,cost,and requirements as part of the DoD,Congressional,and international countries oversight and budgeting processes.Challenges and risks associated with this program include supplier performance,software development,definitizing and receiving funding for contracts on a timely basis,execution of future flight tests and findings resulting from testing and operating the aircraft,the level of cost associated with life cycle operations,sustainment and potential contractual obligations,inflation-related cost pressures and the ability to improve affordability.See also the“Status of the F-35 Program”in Management Discussion and Analysis of Financial Condition and Results of Operations for a discussion of the current program status and specific challenges and risks,including with respect to Technology Refresh 3(TR-3)configuration development and deliveries.We also may not be successful in making hardware upgrades and other modernization capabilities in a timely manner,including as a result of dependencies on suppliers,which could increase costs and create schedule delays.Our ability to capture and retain future F-35 growth in development,production and sustainment is dependent on the success of our efforts to achieve F-35 sustainment performance,customer affordability,supply chain improvements,continued reliability improvements and other efficiencies,some of which are outside our control.See also the Risk Factor below captioned“We are heavily dependent on suppliers and if our subcontractors or other suppliers or teaming agreement or joint venture partners fail to perform their obligations,our performance and ability to win future business could be adversely affected”for further discussion.We are subject to extensive procurement laws and regulations,including those that enable the U.S.Government to terminate contracts for convenience.Our business and reputation could be adversely affected if we or those we do business with fail to comply with these laws and regulations.We must comply with extensive laws and regulations relating to the award,administration and performance of U.S.Government contracts.Government contract laws and regulations affect how we do business with our customers and impose certain risks and costs on our business.A violation of these laws and regulations by us,our employees,others working on our behalf,a supplier or a joint venture partner could harm our reputation and result in the imposition of fines and penalties,the termination of our contracts,suspension or debarment from bidding on or being awarded contracts,loss of our ability to export products or perform services and civil or criminal investigations or proceedings.From time to time,the U.S.Government has proposed contract terms,imposed internal policies,or taken positions that represent fundamental changes from historical practices or that we believe are inconsistent with the FAR or other laws and regulations and that could adversely affect our business.In addition,costs to comply with new government regulations can increase our costs,reduce our margins and adversely affect our competitiveness.Also,a portion of our contracts are classified by the U.S.Government,which imposes security requirements that limit our ability to discuss our performance on these contracts,including any specific risks,disputes and claims.Contract Termination.The U.S.Government may terminate any of our government contracts at its convenience or for default based on our performance,either of which could adversely affect our business and financial performance.Generally,prime contractors have similar termination rights under subcontracts related to government contracts.If a contract is terminated for convenience,we generally are protected by provisions covering reimbursement for costs incurred on the contract and profit on those costs.However,to the extent insufficient funds have been appropriated by the U.S.Government to cover our costs upon a termination for convenience,the U.S.Government may assert that it is not required to appropriate additional funding.If a contract is terminated for default,the U.S.Government could make claims to reduce our recovery or recoup its procurement costs and could assess other special penalties,exposing us to liability and adversely affecting our ability to compete for future 11contracts and orders.In addition,the U.S.Government could terminate a prime contract under which we are a subcontractor,notwithstanding the fact that our performance and the quality of the products or services we delivered were consistent with our contractual obligations as a subcontractor.Undefinitized Contract Action(UCA).When operating under a undefinitized contract action(UCA),which is when we begin performing our obligations before the terms,specifications or price are finally agreed to between the parties,the U.S.Government has the right to unilaterally definitize contracts,which it has exercised in the past and which,absent a successful appeal,obligates us to perform under terms and conditions imposed by the U.S.Government.This can affect our ability to negotiate mutually agreeable contract terms.If a contract is unilaterally imposed upon us,it may negatively affect our expected profit and cash flows on a program or impose burdensome terms.Bid Protests.U.S Government procurement laws permit legal challenges,referred to as bid protests,to the terms of a contract solicitation or the award of a contract.We may encounter bid protests from unsuccessful bidders on new program awards seeking to overturn the award.Unsuccessful bidders also may protest with the goal of being awarded a subcontract for a portion of the work in return for withdrawing the protest.Bid protests can result in significant expenses to us,contract modifications or even loss of the contract award and the resolution can extend the time until contract activity can begin and delay the recognition of sales and defer underlying cash flows and adversely affect our operating results.Our efforts to protest or challenge any bids for contracts that were not awarded to us also may be unsuccessful.Competition and changing procurement policies could adversely affect our business and financial results.We operate in a highly competitive industry and our competitors may have more extensive or more specialized,engineering,technical,marketing and servicing capabilities than we do in certain areas.Our competitors may develop new technologies,products or services that could replace our current offerings.Additionally,if competitors can offer lower cost services and products,or provide services or products more quickly,at equivalent or in some cases even reduced capabilities,we may lose new business opportunities or contract recompetes,which could adversely affect our future results.We are facing increased competition from startups and non-traditional defense contractors,which may have a lower cost structure or be able to move quickly in addition to being favored,in certain cases,by procurement policy.Furthermore,acquisitions in our industry,including vertical integration,also could result in increased competition or limit our access to certain suppliers without appropriate remedies to protect our interests.A substantial portion of our business is awarded through competitive bidding.The U.S.Government increasingly has relied on competitive contract award types,including indefinite-delivery,indefinite-quantity and other multi-award contracts,which have the potential to create pricing pressure and to increase our costs by requiring us to submit multiple bids and proposals.Multi-award contracts require us to make sustained efforts to obtain task orders under the contract.Additionally,procurements that do not evaluate whether the cost assumptions in the bids are realistic can lead to bidders taking aggressive pricing positions,which could result in the winner realizing a loss upon contract award or an increased risk of lower margins or realizing a loss over the term of the contract.Competitors may be willing to accept more risk or lower profitability in competing for contracts than we are.The U.S.Government also may not award us large competitive contracts that we otherwise might have won in an effort to maintain a broad industrial base.U.S.Government procurement policies and procedures and the application thereof are regularly changing and such changes could adversely affect our profitability or the ability to win new business.For example,an increase in the use of contract structures that shift risk to the contractor,such as fixed-price development contracts and incentive-based fee arrangements,or the U.S Government using different award fee criteria than historically used(such as the evaluation of environmental factors)could adversely affect our profit rates or make it more difficult to win new contracts.The DoD is increasingly pursuing rapid acquisition pathways and procedures for new technologies,including through so called“other transaction authority”agreements(OTAs).OTAs are exempt from many traditional procurement laws,including the FAR,and an OTA award may be subject,in certain cases,to the condition that a significant portion of the work under the OTA is performed by a non-traditional defense contractor or that a portion of the cost of the protype project is funded by non-governmental sources.Changes in regulations or interpretations of what are allowable costs under our government contracts could adversely impact our profitability and changes in contract financing policy for fixed-price contracts,such as changes in performance and progress payments policies,could significantly affect the timing of our cash flows.Our profitability and cash flow may vary based on the mix of our contracts and programs,our performance,and our ability to control costs.Our profitability and cash flow may vary materially depending on the types of government contracts undertaken,the nature of products produced or services performed under those contracts,the costs incurred in performing the work,the achievement of other performance objectives and the stage of performance at which the right to receive fees is determined,particularly under award and incentive-fee contracts.Failure to perform to customer expectations and contract requirements may result in reduced fees or losses and may adversely affect our financial performance.12Contract types primarily include fixed-price and cost-reimbursable contracts.Cost-reimbursable contracts provide for the payment of allowable costs incurred during performance of the contract plus a fee up to a ceiling based on the amount that has been funded.Cost,schedule or technical performance issues with respect to cost-reimbursable contracts could result in reduced fees,lower profit rates,or program cancellation.Fixed-price contracts are predominantly either firm fixed-price(FFP)contracts or fixed-price incentive(FPI)contracts.Under FFP contracts,we receive a fixed price irrespective of the actual costs we incur and therefore we carry the burden of any cost overruns.Under FPI contracts the U.S.Government is responsible for our costs up to a negotiated ceiling price and we generally share,based on a negotiated sharing formula,savings from cost underruns and expenses,up to the negotiated ceiling price,from cost overruns.We bear the risk for all cost overruns that exceed the negotiated ceiling price.Due to the fixed-price nature of the contracts,if our actual costs exceed our estimates,our margins and profits are reduced and we could incur a reach-forward loss.A reach-forward loss is when estimates of total costs to be incurred on a contract exceed total estimates of the transaction price.When this occurs,a provision for the entire loss is determined at the contract level and is recorded in the period in which the loss is evident.Under both fixed-price and cost-reimbursable contracts,if we are unable to control costs,our operating results could be adversely affected.Costs to complete a contract may increase for many reasons,including technical and manufacturing challenges,schedule delays,workforce-related issues,inaccurate initial contract cost estimates,the timeliness and availability of materials from suppliers,internal and subcontractor performance or product quality issues,inability to meet cost reduction initiatives or achieve efficiencies from digital transformation,changing laws or regulations,inflation and natural disasters.Certain contracts may impose other risks,such as forfeiting fees,paying penalties,or providing replacement systems in the event of performance failure.Contracts for development programs include complex design and technical requirements and are often contracted on a cost-reimbursable basis,however,some of our existing development programs are contracted on a fixed-price basis.In addition,we have certain contracts where we bid upfront on cost-reimbursable development work and the follow-on fixed-price production options in one submission.We expect we also will bid on similar programs in the future.Fixed-price development work or fixed-price production options,especially on competitively bid programs,is inherently riskier than cost-reimbursable work because the revenue is fixed,while the estimates of costs required to complete these contracts are subject to significant variability due to the nature of development programs.The technical complexity coupled with the fixed-price contract structure of certain of our ongoing development programs or new programs increases the risk that our costs will be greater than anticipated,resulting in reduced margins,operating profit,or reach-forward losses during the period of contract performance or upon contract award,all of which could be significant to our operating results,cash flows,or financial condition.Bidding upfront on fixed-price production options increases the risk that we may experience lower margins than expected,or a loss,on the production options because we must estimate the cost of producing a product before it has been developed.These risks may cause us not to bid on certain future programs,which could adversely affect our future growth prospects and financial performance.See Note 1 Organization and Significant Accounting Policies included in our Notes to Consolidated Financial Statements for further details about losses incurred on certain programs,including fixed-price development programs.Contracts for the transition from development to production(e.g.,low rate initial production(LRIP)contracts)also create performance and financial risks to our business because of the challenge of starting and stabilizing a manufacturing production and test line while concurrently validating final design and managing change in requirements or capabilities requested by the customer.Many of our contracts include multiple option years exercisable at the customers discretion,which carries risk.The customer may decline to exercise an option,or the customer may exercise an option on a contract for which we expect to incur a loss or perform at a low margin,either of which could adversely affect our financial results.We are routinely subject to audit by our customers on government contracts and the results of those audits could have an adverse effect on our business,reputation and results of operations.U.S.Government agencies,including the Defense Contract Audit Agency,the Defense Contract Management Agency and various agency Inspectors General,routinely audit and investigate government contractors.These agencies review a contractors compliance with applicable laws,regulations and contract terms,regarding,among other things,contract pricing,contract performance,cost structure and business systems.U.S.Government audits and investigations often take years to complete,and many result in no adverse action against us.Like many U.S.Government contractors,we have received audit and investigative reports recommending the reduction of certain contract prices or that certain payments be repaid,delayed,or withheld,and may involve substantial amounts.Similarly,like other U.S.Government contractors,audits and investigations also occur related to cost reimbursements that are based upon our final allowable incurred costs for each year.We have unaudited or unsettled incurred cost claims related to past years,which limits our ability to issue final billings on contracts for which authorized and appropriated funds may be expiring or can result in delays in final billings and our ability to close out a contract.13If an audit or investigation uncovers improper or illegal activities,we may be subject to civil or criminal penalties and administrative sanctions,including reductions of the value of contracts,contract modifications or terminations,forfeiture of profits,suspension of payments,penalties,fines or suspension or debarment from doing business with the U.S.Government.Suspension or debarment could have a material adverse effect on us because of our dependence on contracts with the U.S.Government.In addition,we could suffer serious reputational harm if allegations of impropriety were made against us.Similar government oversight and risks to our business and reputation exist in most other countries where we conduct business.Other Risks Related to our OperationsWe are heavily dependent on suppliers and if our subcontractors or other suppliers or teaming agreement or joint venture partners fail to perform their obligations,our performance and ability to win future business could be adversely affected.We are the prime contractor on most of our contracts and rely on other companies to provide materials,major components and products,and to perform a portion of the services that are provided to our customers under the terms of most of our contracts.These arrangements may involve subcontracts,teaming arrangements,joint ventures,or supply agreements with other companies on which we rely(contracting parties)and,in many cases,our contracting parties in turn rely on lower-tier subcontractors.We sometimes have disputes with our contracting parties,including disputes regarding the cost,quality and timeliness of work performed,workshares,customer concerns about the other partys performance,issues related to lower-tier subcontractor performance,our failure to issue or extend task orders,or our hiring the personnel of a subcontractor,teammate or joint venture partner or vice versa.We also could be adversely affected by actions or issues experienced by our contracting parties that are outside of our control,such as misconduct and reputational issues involving our contracting parties,which could subject us to liability or adversely affect our ability to compete for contract awards.The financial stability and viability of our contracting parties or lower-tier subcontractors have and in the future could adversely affect their ability to meet their performance obligation.A failure by one or more of our contracting parties to provide the agreed-upon materials,components or products,or perform the agreed-upon services,on a timely basis,according to specifications,including compliance with regulatory requirements we flow down from our prime contracts,or at all,has and may adversely affect our ability to perform our obligations and require that we transition the work to other companies.Contracting party performance deficiencies may result in additional costs or delays in product deliveries and affect our operating results and could result in a customer terminating our contract for default or convenience.A default termination could expose us to liability and affect our ability to compete for future contracts and orders.A failure by our contracting parties to meet affordability targets could negatively affect our profitability,result in contract losses and affect our ability to win new business.Additionally,we are affected by government procurement restrictions and issues affecting industry supply chains broadly.For example,U.S.Government statutes and regulations impose restrictions in the sourcing of items from specified countries.We seek to manage supply risk through long-term contracts,identifying domestic or other U.S.allied alternative sources of items and maintaining an acceptable level of our key materials in inventories.Advanced microelectronics,including semiconductors,underpin many of our current and future critical technologies and platforms,and global shortages of these products due to increased demand or other supply chain challenges could result in increased procurement lead times and increased costs and potential shortages,which could affect our performance.We also must comply with specific procurement requirements that can limit the number of eligible suppliers and a significant number of the components or supplies used are currently single or sole sourced.Because the identification and qualification of new or additional suppliers can take an extended period of time,issues with suppliers or trade actions that limit our ability to use certain suppliers,especially when single or sole sourced,can have an adverse impact on our business.Complying with U.S.Government contracting regulations that limit the source or manufacture of suppliers and impose stringent cybersecurity regulations also may create challenges for our supply chain and increase costs.We remain heavily dependent on our supply chain for sourcing contractually compliant components,which is outside of our direct control and is multi-tiered.The future occurrence of non-compliant components in our programs could cause suspensions in product deliveries,remediation work on installed components,contract price adjustments and alternate supply sourcing,all of which could adversely affect our results of operations,financial condition and cash flows.Our success depends,in part,on our ability to develop new technologies,products and services and efficiently produce and deliver existing products.Many of the products and services we provide are highly engineered and involve sophisticated technologies with related complex manufacturing and systems integration processes.Our customers requirements change and evolve regularly.Accordingly,our future performance depends,in part,on our ability to adapt to changing customer needs rapidly,identify emerging technological trends,develop and manufacture innovative products and services efficiently and bring those offerings to market quickly at cost-effective prices.This includes efforts to provide mission solutions that integrate capabilities and resources across all forces and domains,which we refer to as joint all domain operations,and to implement emerging digital and network technologies and capabilities.Artificial intelligence technologies have rapidly developed and our business may be 14adversely affected if we cannot successfully integrate the technology into our internal business processes and product and service offerings in a timely,cost-effective,compliant and responsible manner.To advance our innovation and position us to meet our customers requirements,we make investments in emerging technologies that we believe are needed to keep pace with rapid industry innovation and seek to collaborate with commercial entities that we believe have complementary technologies to ours.These commercial entities may not be accustomed to government contracting and may be unwilling to agree to the governments customary terms,including with respect to intellectual property,liability and indemnification term,which may prevent or lessen the benefit of collaboration.We may not be successful in identifying or developing emerging technologies and may spend significant resources on projects that ultimately are unsuccessful or yield a low return on the amount invested.Our future success in delivering innovative and affordable solutions to our customers relies,in part,on our multi-year business transformation initiative that seeks to significantly enhance our digital infrastructure to increase efficiencies and collaboration throughout our business while reducing costs.This digital transformation effort requires substantial investment and if we are unable to successfully implement the strategy or do so in a timely manner,our results of operations and future competitiveness may be adversely affected.If we fail in our development projects or if our new products or technologies fail to achieve customer acceptance or competitors develop more capable technologies or offerings,we may be unsuccessful in obtaining new contracts or winning all or a portion of next generation programs,including in key areas such as hypersonics and classified work,and this could adversely affect our future performance and financial results.Geopolitical,macroeconomic and public health events and conditions could adversely affect our business,operating results,financial condition and cash flows.Geopolitical.Our business is highly sensitive to geopolitical and security issues,including foreign policy actions taken by governments such,as tariffs,sanctions,embargoes,export and import controls and other trade restrictions,which can affect the demand for our products and services,the ability to sell our products and services,and disrupt our supply chain,all of which could adversely affect our business.Global conflicts,including Russias invasion of Ukraine,have significantly elevated global geopolitical tensions and security concerns.The conflict has resulted in increased demand for some of our products and services;however,if we are unable to increase production to meet demand on the timeframe expected by potential customers,whether it be from supply constraints,government funding or otherwise,then we may lose sales opportunities as they seek alternatives,even less capable ones,that may be able to be delivered more quickly.In addition,the U.S.Government and other nations have implemented broad economic sanctions and export controls targeting Russia,which,combined with the Ukraine conflict,has indirectly disrupted the global supply chain and increased pressures on certain resources.The Ukraine conflict also has increased the threat of malicious cyber activity from nation states and other actors.Chinas Ministry of Commerce announced in 2023 that it had added Lockheed Martin Corporation to its“unreliable entities list”in connection with certain foreign military sales by the U.S.Government to Taiwan involving our products and services,and that it would impose certain sanctions against us,including a fine equal to twice the value of the arms that we had sold to Taiwan since September 2020.In addition,China prohibited our CEO,COO and CFO from traveling or working in China.We will continue to follow official U.S.Government guidance as it relates to sales to Taiwan and do not currently expect a material impact to our business from these actions.In 2023,China also implemented broad-based export restrictions on certain minerals used in the production,among other things,of semiconductors and missile systems.If China were to further restrict the export of certain materials,take further actions to enforce the existing sanctions on us or impose additional sanctions,or impose sanctions on our suppliers,teammates or partners,our business could be adversely affected.International sales also may be adversely affected by actions taken by the U.S.Government in the exercise of foreign policy,Congressional oversight or the financing of particular programs,including the prevention or imposition of conditions upon the sale and delivery of our products or the transfer of sensitive technology,the imposition of sanctions,or Congressional action to restrict sales of our products.For example,the U.S.Government has imposed certain sanctions on Trkish entities and persons,which has affected our ability to obtain certain U.S.export permits or authorizations necessary to perform under our existing contracts supporting the Trkish Utility Helicopter Program(TUHP),our work with Trkish industry and our opportunity for sales in Trkiye generally.See“Note 1 Organization and Significant Accounting Policies”included in our Notes to Consolidated Financial Statements for more information on TUHP.Our inability to perform under contracts with international customers as a result of actions taken by the U.S.Government has resulted and may in the future result in our inability to recover our costs and reach forward losses,claims and contract terminations by these customers and suppliers,which could have an adverse effect on our operating results.Macroeconomic.Heightened levels of inflation and the potential worsening of macro-economic conditions,including slower growth or recession,changes to fiscal and monetary policy,tighter credit,higher interest rates and currency fluctuations,present a risk for us,our suppliers and the stability of the broader defense industrial base.If we are unable to successfully 15mitigate the impact of inflation,our profits,margins and cash flows,particularly for existing fixed-price contracts,may be adversely affected.Although we believe defense spending is more resilient to adverse macro-economic conditions than many other industrial sectors,our suppliers and other partners,many of which are more exposed to commercial markets or have fewer resources,may be adversely impacted to a more significant degree than we are by an economic downturn,which could affect their performance and adversely impact our operations.In addition,macroeconomic conditions could cause budgetary pressures for our government customers resulting in reductions or delays in spending,which could adversely impact our business.Higher interest rates increase the borrowing costs on new debt and could affect the fair value of our investments.Interest rates also impact our pension.For example,higher interest rates generally reduce the measure of our gross pension obligations while lower interest rates increase it.Public health.We face a wide variety of risks related to public health crises,epidemics,pandemics or similar events,including COVID-19.If a new health epidemic or outbreak were to occur,we could experience broad and varied impacts similar to the impact of COVID-19,including adverse impacts to our workforce and supply chain,inflationary pressures and increased costs,schedule or production delays,market volatility and other financial impacts.If any of these were to occur,our future results and performance could be adversely impacted.International sales may pose different economic,regulatory,competition and other risks.International sales present risks that are different and potentially greater than those encountered in our U.S.business.In 2023,26%of our total net sales were from international customers.International sales are subject to numerous political and economic factors,including changes in foreign national priorities,foreign government budgets,global economic conditions,and fluctuations in foreign currency exchange rates,the possibility of trade sanctions and other government actions,regulatory requirements,significant competition,taxation,and other risks associated with doing business outside the U.S.Sales of military products and services and any associated industrial development(offset)agreements are subject to U.S.export regulations and foreign policy,and there could be significant delays or other issues in reaching definitive agreements for announced programs.See the Risk Factor“Geopolitical,macroeconomic and public health events and conditions could adversely affect our business,operating results,financial condition and cash flows.”Competition for international sales is intense,including from international manufacturers whose governments sometimes provide research and development assistance,marketing subsidies and other assistance for their products and services.Our international business is conducted through foreign military sales(FMS)contracted through the U.S.Government and by direct commercial sales(DCS)to international customers.FMS contracts with the U.S.Government are subject to the FAR and the DFARS.Because the U.S.Government functions as an intermediary in FMS sales,we are reliant on the capacity and speed of the DoDs administration of requests from non-U.S.countries to convert requests to sales.In contrast,DCS transactions represent sales directly to international customers and are subject to U.S.and foreign laws and regulations,including product testing,import-export control,technology transfer restrictions,investments,taxation,repatriation of earnings,exchange controls,the Foreign Corrupt Practices Act and other anti-corruption laws and regulations,and the anti-boycott provisions of the U.S.Export Control Reform Act of 2018.While we have extensive policies in place to comply with such laws and regulations,failure by us,our employees or others working on our behalf to comply with these laws and regulations could result in administrative,civil,or criminal liabilities,including suspension,debarment from bidding for or performing government contracts,or suspension of our export privileges,which could have a material adverse effect on us.We frequently team with international subcontractors and suppliers who also are exposed to similar risks.We believe DCS transactions present a higher level of potential risks because they involve direct commercial relationships with parties with which we typically have less familiarity.Additionally,international procurement and local country rules and regulations,contract laws and judicial systems differ from those in the U.S.and,in some cases,may be less predictable than those in the U.S.,which could impair our ability to enforce contracts and increase the risk of adverse or unpredictable outcomes,including the possibility that certain matters that would be considered civil matters in the U.S.are treated as criminal matters in other countries.In conjunction with defense procurements,some international customers require contractors to comply with industrial cooperation regulations,including entering into industrial participation,industrial development or localization agreements,sometimes referred to as offset agreements(also known as offset contracts),as a condition to obtaining orders for our products and services.These offset agreements generally extend over several years and obligate the contractor to perform certain commitments,which may include in-country purchases,technology transfers,local manufacturing support,consulting support to in-country projects,investments in joint ventures and financial support projects,and preference for local suppliers or subcontractors.The customers expectations in respect of the scope of offset commitments can be substantial,including high-value content,and may exceed existing local technical capability.Failure to meet these commitments,which can be subjective and outside of our control,may result in significant penalties,and could lead to a reduction in sales to a country.Furthermore,some of our existing offset agreements are dependent upon the successful operation of joint ventures that we do not control and involve products and services that are outside of our core business,which may increase the risk of breaching our obligations,16exposing us to compliance risks of the joint venture,and impairing our ability to recover our investment.For more information on our industrial development obligations,including the notional value of our remaining industrial development obligations and potential penalties for non-compliance,see“Contractual Commitments”in Managements Discussion and Analysis of Financial Condition and Results of Operations.We may be unable to benefit fully from or adequately protect our intellectual property rights or use third-party intellectual property,which could negatively affect our business.We own a substantial number of U.S.and foreign patents and trademarks related to the products and services we provide.In addition to owning a large portfolio of patents and trademarks,we develop and own other intellectual property,including copyrights,trade secrets and research,development and engineering know-how,which contribute significantly to our business.We also license intellectual property to and from third parties.The FAR and DFARS provide that the U.S.Government obtains certain rights in intellectual property,including patents,developed by us and our subcontractors and suppliers in performance of government contracts or with government funding.The U.S.Government may use or authorize others,including competitors,to use such intellectual property.Non-U.S.governments also may have certain rights in patents and other intellectual property developed in performance of our contracts with these entities.The U.S.Government is pursuing aggressive positions regarding the types of intellectual property to which government use rights apply and when it is appropriate for the government to insist on broad use rights.The DoD is also implementing an overarching intellectual property acquisition policy that will require a greater focus and planning as to intellectual property rights for its programs,and we have no assurance as to the potential impacts of this policy or any associated regulatory changes on future acquisitions.The DoDs efforts could affect our ability to protect and exploit our intellectual property and to leverage supplier intellectual property,for example,if we are unable to obtain necessary licenses from our suppliers to meet government requirements.Additionally,third parties may assert that our products or services infringe their intellectual property rights,which could result in costly and time-consuming disputes,subject us to damages and injunctions and adversely affect our ability to compete and perform on certain contracts.Our business and financial performance depends on us identifying,attracting and retaining a highly skilled workforce.Our performance is dependent upon us identifying,attracting,developing,motivating and retaining a highly skilled workforce with the requisite skills in multiple areas including:engineering,science,manufacturing,information technology,cybersecurity,business development and strategy and management.Due to the national security nature of our work,our performance is also dependent upon personnel who hold security clearances and receive substantial training to work on certain programs or tasks and can be difficult to replace on a timely basis if we experience unplanned attrition.The market for highly skilled workers and leaders in our industry as well as the market for individuals holding high-level security clearances is extremely competitive and not confined to our industry.For example,we compete with commercial technology companies outside of the aerospace and defense industry for qualified technical,cyber and scientific positions,which may not face the same type of cost pressures as a government contractor and which may be able to offer more flexible work arrangements given that certain of our employees must perform the majority of their work in a secure facility because of the need to access classified information.If we cannot adequately attract and retain personnel with the requisite skills or clearances in this competitive market,our performance and future prospects may be adversely affected.Workforce dynamics are constantly evolving.If we do not manage changing workforce dynamics effectively,it could adversely affect our culture,reputation and operational flexibility.Beginning with the COVID-19 pandemic,a significant portion of our workforce began working remotely and we expect a significant portion to continue working remotely under our hybrid workforce model.If we are unable to effectively adapt to this hybrid work environment long term,then we may experience a less cohesive workforce,increased attrition,reduced program performance and less innovation.It is also critical that we develop and train employees,hire new qualified personnel,and successfully manage the short and long-term transfer of critical knowledge and skills,including leadership development and succession planning throughout our business.While we have processes in place for management transition and the transfer of knowledge and skills,the loss of key personnel,coupled with an inability to adequately train other personnel,hire new personnel or transfer knowledge and skills,could significantly impact our ability to perform under our contracts and execute on new or growing programs.Additionally,approximately 19%of our workforce is comprised of employees that are covered by collective bargaining agreements with various unions.If we encounter difficulties with renegotiations or renewals of collective bargaining arrangements or are unsuccessful in those efforts,we could incur additional costs and experience work stoppages.Union actions at suppliers also can affect us.Any delays or work stoppages could adversely affect our ability to perform under our cont
2024-08-09
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UNITED STATES SECURITIES AND EXCHANGE COMMISSIONWashington,D.C.20549FORM10-K ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended December 31,2023 or TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)OF THE SECURITIES EXCHANGE ACT OF 1934For the transition period from to Commission File Number:001-34139 Federal Home Loan Mortgage Corporation(Exact name of registrant as specified in its charter)Federallychartered52-09048748200JonesBranchDrive22102-3110(703)903-2000corporationMcLean,Virginia(Stateorotherjurisdictionof incorporationororganization)(I.R.S.EmployerIdentificationNo.)(Address of principal executive offices)(Zip Code)(Registrantstelephonenumber,including area code)Securities registered pursuant to Section12(b)of the Act:Title of each classTrading Symbol(s)Name of each exchange on which registeredNoneN/AN/ASecurities registered pursuant to Section12(g)of the Act:Voting Common Stock,no par value per share(OTCQB:FMCC)Variable Rate,Non-Cumulative Preferred Stock,par value$1.00 per share(OTCQB:FMCCI)5%Non-Cumulative Preferred Stock,par value$1.00 per share(OTCQB:FMCKK)Variable Rate,Non-Cumulative Preferred Stock,par value$1.00 per share(OTCQB:FMCCG)5.1%Non-Cumulative Preferred Stock,par value$1.00 per share(OTCQB:FMCCH)5.79%Non-Cumulative Preferred Stock,par value$1.00 per share(OTCQB:FMCCK)Variable Rate,Non-Cumulative Preferred Stock,par value$1.00 per share(OTCQB:FMCCL)Variable Rate,Non-Cumulative Preferred Stock,par value$1.00 per share(OTCQB:FMCCM)Variable Rate,Non-Cumulative Preferred Stock,par value$1.00 per share(OTCQB:FMCCN)5.81%Non-Cumulative Preferred Stock,par value$1.00 per share(OTCQB:FMCCO)6%Non-Cumulative Preferred Stock,par value$1.00 per share(OTCQB:FMCCP)Variable Rate,Non-Cumulative Preferred Stock,par value$1.00 per share(OTCQB:FMCCJ)5.7%Non-Cumulative Preferred Stock,par value$1.00 per share(OTCQB:FMCKP)Variable Rate,Non-Cumulative Perpetual Preferred Stock,par value$1.00 per share(OTCQB:FMCCS)6.42%Non-Cumulative Perpetual Preferred Stock,par value$1.00 per share(OTCQB:FMCCT)5.9%Non-Cumulative Perpetual Preferred Stock,par value$1.00 per share(OTCQB:FMCKO)5.57%Non-Cumulative Perpetual Preferred Stock,par value$1.00 per share(OTCQB:FMCKM)5.66%Non-Cumulative Perpetual Preferred Stock,par value$1.00 per share(OTCQB:FMCKN)6.02%Non-Cumulative Perpetual Preferred Stock,par value$1.00 per share(OTCQB:FMCKL)6.55%Non-Cumulative Perpetual Preferred Stock,par value$1.00 per share(OTCQB:FMCKI)Fixed-to-Floating Rate Non-Cumulative Perpetual Preferred Stock,par value$1.00 per share(OTCQB:FMCKJ)Indicate by check mark if the registrant is a well-known seasoned issuer,as defined in Rule405 of the Securities Act.Yes NoIndicate by check mark if the registrant is not required to file reports pursuant to Section13 or Section15(d)of the Act.YesNoIndicate by check mark whether the registrant:(1)has filed all reports required to be filed by Section13 or 15(d)of the Securities Exchange Act of 1934 during the preceding 12months(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 90days.Yes NoIndicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule405 of RegulationS-T(232.405 of this chapter)during the preceding 12months(or for such shorter period that the registrant was required to submit such files).Yes NoIndicate by check mark whether the registrant is a large accelerated filer,an accelerated filer,a non-accelerated filer,a smaller reporting company,or an emerging growth company.See the definitions of large accelerated filer,accelerated filer,smaller reporting company,and emerging growth company in Rule12b-2 of the Exchange Act.Large accelerated filerAccelerated filerEmerging growth company Non-acceleratedfilerSmallerreportingcompanyIf an emerging growth company,indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a)of the Exchange Act.Indicate by check mark whether the registrant has filed a report on and attestation to its managements assessment of the effectiveness of internal control over financial reporting under Section 404(b)of the Sarbanes-Oxley Act(15 U.S.C.7262(b)by the registered public accounting firm that prepared or issued its audit report.If securities are registered pursuant to Section 12(b)of the Act,indicate by check mark whether the financial statements of the registrant included in the filing reflect the correction of an error to previously issued financial statements.Indicate by check mark whether any of those error corrections are restatements that required a recovery analysis of incentive-based compensation received by any of the registrants executive officers during the relevant recovery period pursuant to 240.10D-1(b).Indicate by check mark whether the registrant is a shell company(as defined in Rule12b-2 of the Exchange Act).Yes No The aggregate market value of the common stock held by non-affiliates computed by reference to the price at which the common stock was last sold on June30,2023(the last business day of the registrants most recently completed second fiscal quarter)was$0.3billion.As of January 31,2024,there were 650,059,553 shares of the registrants common stock outstanding.DOCUMENTS INCORPORATED BY REFERENCE:NoneTable of ContentsINTRODUCTION1nAbout Freddie Mac1nOur Business6n Forward-Looking Statements11MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS13n Housing and Mortgage Market Conditions13n Consolidated Results of Operations15n Consolidated Balance Sheets Analysis21n Our Portfolios22n Our Business Segments24n Risk Management49lCredit Risk52lMarket Risk79lOperational Risk84n Liquidity and Capital Resources89n Conservatorship and Related Matters101n Regulation and Supervision104n Critical Accounting Estimates111RISK FACTORS112LEGAL PROCEEDINGS131MARKET FOR REGISTRANTS COMMON EQUITY,RELATED STOCKHOLDER MATTERS,AND ISSUER PURCHASES OF EQUITY SECURITIES132FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA133n Report of Independent Registered Public Accounting Firm(PCAOB ID 238)134n Consolidated Financial Statements136CONTROLS AND PROCEDURES217OTHER INFORMATION219DIRECTORS,CORPORATE GOVERNANCE,AND EXECUTIVE OFFICERS220n Directors220n Corporate Governance228n Executive Officers239EXECUTIVE COMPENSATION242n Compensation Discussion and Analysis242n Compensation and Risk257n CEO Pay Ratio258n 2023 Compensation Information for NEOs259SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS265CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS267PRINCIPAL ACCOUNTING FEES AND SERVICES269EXHIBITS AND FINANCIAL STATEMENT SCHEDULES271GLOSSARY272EXHIBIT INDEX280SIGNATURES286FORM 10-K INDEX288Table of ContentsFREDDIE MAC|2023 Form 10-KiMD&A TABLE INDEX1Summary of Consolidated Statements of Income and Comprehensive Income152Components of Net Interest Income 153Analysis of Net Interest Yield 174Net Interest Income Rate/Volume Analysis185Components of Non-Interest Income196(Provision)Benefit for Credit Losses197Components of Non-Interest Expense208Summarized Consolidated Balance Sheets219Mortgage Portfolio2210Mortgage-Related Investments Portfolio2311Other Investments Portfolio2312Single-Family Segment Financial Results3913Multifamily Segment Financial Results4814Allowance for Credit Losses Activity5315Allowance for Credit Losses Ratios5316Principal Amounts Due for Held-for-Investment Loans5417Single-Family New Business Activity5718Single-Family Mortgage Portfolio Newly Acquired Credit Enhancements5819Single-Family Mortgage Portfolio Credit Enhancement Coverage Outstanding5920Serious Delinquency Rates for Credit-Enhanced and Non-Credit-Enhanced Loans in Our Single-Family Mortgage Portfolio5921Credit Enhancement Coverage by Year of Origination6022Single-Family Mortgage Portfolio Without Credit Enhancement6023Credit Quality Characteristics of Our Single-Family Mortgage Portfolio6224Characteristics of the Loans in Our Single-Family Mortgage Portfolio6325Single-Family Mortgage Portfolio Attribute Combinations6426Seriously Delinquent Single-Family Loans6527Single-Family Relief Refinance Loans6628Single-Family Completed Loan Workout Activity6629Credit Characteristics of Single-Family Modified Loans6630Payment Performance of Single-Family Modified Loans6631Single-Family REO Activity6732Single-Family Collateral Deficiency Ratios6733Percentage of Multifamily New Business Activity With Higher Risk Characteristics6934Multifamily Mortgage Portfolio CRT Issuance7035Credit-Enhanced and Non-Credit-Enhanced Loans Underlying Our Multifamily Mortgage Portfolio7036Level of Subordination Outstanding7137Credit Quality of Our Multifamily Mortgage Portfolio Without Credit Enhancement71 38Single-Family Mortgage Purchases from Non-Depository Sellers7439Single-Family Mortgage Portfolio Non-Depository Servicers7440Single-Family Primary Mortgage Insurers7641Single-Family ACIS Counterparties7642Derivative Counterparty Credit Exposure7743PVS-YC and PVS-L Results Assuming Shifts of the Yield Curve8144Duration Gap and PVS Results81Table DescriptionPageTable of ContentsMD&A Table IndexFREDDIE MAC|2023 Form 10-Kii45PVS-L Results Before Derivatives and After Derivatives8146Earnings Sensitivity to Changes in Interest Rates83 47Liquidity Sources9048Funding Sources9149Debt of Freddie Mac Activity9250Maturity and Redemption Dates9351Debt of Consolidated Trusts Activity9352Freddie Mac Credit Ratings94 53Net Worth Activity9654Regulatory Capital Components9855Statutory Capital Components9856Capital Metrics Under ERCF99572022 and 2021 Affordable Housing Goals Results107582022-2024 Single-Family Affordable Housing Goal Benchmark Levels108592023-2024 Multifamily Affordable Housing Goal Benchmark Levels10860Forecasted House Price Growth Rates11161Board Compensation Levels23762Director Compensation238632023 Target TDC245642023 Deferred Salary25065CEO Pay Ratio25866Compensation Summary25967Grants of Plan-Based Awards26068SERP Benefit26169Compensation and Benefits if NEO Terminated Employment as of December 31,202326370Stock Ownership by Directors and Executive Officers26571Stock Ownership by Greater-Than 5%Holders26672Auditor Fees269Table DescriptionPageTable of ContentsMD&A Table IndexFREDDIE MAC|2023 Form 10-KiiiIntroductionThis Annual Report on Form 10-K includes forward-looking statements that are based on current expectations and that are subject to significant risks and uncertainties.These forward-looking statements are made as of the date of this Form 10-K.We undertake no obligation to update any forward-looking statement to reflect events or circumstances after the date of this Form 10-K.Actual results might differ significantly from those described in or implied by such statements due to various factors and uncertainties,including those described in the Forward-Looking Statements and Risk Factors sections of this Form 10-K.Throughout this Form 10-K,we use certain acronyms and terms that are defined in the Glossary.ABOUT FREDDIE MACFreddie Mac is a GSE chartered by Congress in 1970,with a mission to provide liquidity,stability,and affordability to the U.S.housing market.We do this primarily by purchasing single-family and multifamily residential mortgage loans originated by lenders.In most instances,we package these loans into guaranteed mortgage-related securities,which are sold in the global capital markets,and transfer interest-rate and liquidity risks to third-party investors.In addition,we transfer a portion of our mortgage credit risk exposure to third-party investors through our credit risk transfer programs,which include securities-and insurance-based offerings.We also invest in mortgage loans and mortgage-related securities.We do not originate mortgage loans or lend money directly to mortgage borrowers.We support the U.S.housing market and the overall economy by enabling Americas families to access mortgage loan funding with better terms and by providing consistent liquidity to the single-family and multifamily mortgage markets.We have helped many distressed borrowers keep their homes or avoid foreclosure and have helped many distressed renters avoid eviction.Business ResultsConsolidated Financial ResultsNet Revenues and Net Income(In billions)$22.0$21.3$21.2$12.1$9.3$10.5Net RevenuesNet Income202120222023Net Worth as of December 31,(In billions)$28.0$37.0$47.7202120222023Key Drivers:n 2023 vs.2022 lNet income was$10.5 billion,an increase of 13%year-over-year,primarily driven by a credit reserve release in Single-Family in 2023 compared to a credit reserve build in Single-Family in 2022,partially offset by higher non-interest expense.l Net revenues were$21.2 billion,down slightly year-over-year,as higher net interest income was offset by lower non-interest income.IntroductionAbout Freddie MacFREDDIE MAC|2023 Form 10-K1lNet worth was$47.7 billion as of December 31,2023,up from$37.0 billion as of December 31,2022.n 2022 vs.2021lNet income was$9.3billion,a decrease of 23%year-over-year,primarily driven by a credit reserve build in Single-Family.l Net revenues were$21.3 billion,down 3%year-over-year,as higher net interest income in Single-Family was offset by a decline in non-interest income in Multifamily.lNet worth was$37.0 billion as of December 31,2022,up from$28.0 billion as of December 31,2021.Market LiquidityMarket Liquidity(In thousands)4,8912,4961,4021,3781,0398062,858764149655693447Single-Family purchase borrowersSingle-Family refinance borrowersMultifamily rental units202120222023We support the U.S.housing market by executing our mission to provide liquidity and help maintain credit availability for new and refinanced single-family mortgages as well as for rental housing.We provided$348 billion in liquidity to the mortgage market in 2023,which enabled the financing of 1.4 million home purchases,refinancings,and rental units.IntroductionAbout Freddie MacFREDDIE MAC|2023 Form 10-K2Portfolio BalancesMortgage Portfolio as of December 31,(UPB in billions)$3,207$3,415$3,480$2,792$2,986$3,039$415$429$441Single-Family mortgage portfolioMultifamily mortgage portfolio202120222023Key Drivers:n 2023 vs.2022l Our mortgage portfolio increased 2%year-over-year to$3.5 trillion at December 31,2023.Our Single-Family mortgage portfolio was$3.0 trillion at December 31,2023,up 2%year-over-year,as portfolio growth moderated in 2023 due to the slowdown in new business activity as both home purchase and refinance activity were adversely affected by higher mortgage interest rates.Our Multifamily mortgage portfolio was$441 billion at December 31,2023,up 3%year-over-year,as portfolio growth moderated in 2023 due to the slowdown in new business activity driven by higher mortgage interest rates.n 2022 vs.2021lOur mortgage portfolio increased 6%year-over-year to$3.4 trillion at December 31,2022.Our Single-Family mortgage portfolio was$3.0 trillion at December 31,2022,up 7%year-over-year,primarily driven by an increase in average portfolio loan size and a higher share of single-family mortgage debt outstanding.The increase in the average portfolio loan size was driven by house price appreciation in 2022,which contributed to new business acquisitions having a larger loan size compared to older vintages that continued to run off.Our Multifamily mortgage portfolio was$429 billion at December 31,2022,up 3%year-over-year,primarily driven by new business activity,partially offset by increased borrower payoff activity driven by market conditions.IntroductionAbout Freddie MacFREDDIE MAC|2023 Form 10-K3Credit Enhancement CoverageSingle-Family Mortgage Portfolio with Credit Enhancement as of December 31,(UPB in billions)$1,491$1,832$1,86053aa%UPBPercentage202120222023Multifamily Mortgage Portfolio with Credit Enhancement as of December 31,(UPB in billions)$389$398$41594%UPBPercentage202120222023In addition to transferring interest-rate and liquidity risk to third-party investors through our securitization activities,we engage in various types of credit enhancements,such as primary mortgage insurance and CRT transactions,to reduce our credit risk exposure and transfer a portion of the credit risk on certain loans in our mortgage portfolio to third parties.At December 31,2023,we had credit enhancement coverage of 61%on our Single-Family mortgage portfolio and 94%on our Multifamily mortgage portfolio.See MD&A-Our Business Segments and MD&A-Risk Management-Credit Risk for additional information on our credit enhancements.Conservatorship and Government Support for Our BusinessSince September 2008,we have been operating in conservatorship,with FHFA as our Conservator.The conservatorship and related matters significantly affect our management,business activities,financial condition,and results of operations.Our future is uncertain,and the conservatorship has no specified termination date.We do not know what changes may occur to our business model during or following conservatorship,including whether we will continue to exist.In connection with our entry into conservatorship,we entered into the Purchase Agreement with Treasury under which we issued Treasury both senior preferred stock and a warrant to purchase common stock in consideration for Treasurys commitment to provide funding to us.The Purchase Agreement with Treasury is critical to keeping us solvent and avoiding the appointment of a receiver by FHFA under statutory mandatory receivership provisions.We believe that the support provided by Treasury pursuant to the Purchase Agreement currently enables us to have adequate liquidity to conduct normal business activities.The Purchase Agreement with Treasury significantly affects our business activities,including by limiting:our secondary market activities;our single-family and multifamily loan acquisitions;the amount of indebtedness we can incur;the size of our mortgage-related investments portfolio;and our ability to pay dividends,transfer certain assets,raise capital,pay down the liquidation preference of the senior preferred stock,and exit conservatorship.Treasury,as the holder of the senior preferred stock,is entitled to receive cumulative quarterly cash dividends,when,as,and if declared by the Board of Directors.The dividends we have paid to Treasury on the senior preferred stock have been declared by,and paid at the direction of,the Conservator,acting as successor to the rights,titles,powers,and privileges of the Board of Directors.Pursuant to the Purchase Agreement,Freddie Mac will not be required to pay a dividend to Treasury on the senior preferred stock until it has built sufficient net worth to meet the capital requirements and buffers set forth in the ERCF.As the company IntroductionAbout Freddie MacFREDDIE MAC|2023 Form 10-K4builds capital during this period,increases in our Net Worth Amount have been,or will be,added to the aggregate liquidation preference of the senior preferred stock.After we have maintained the level of capital prescribed in the Purchase Agreement for the requisite time,we will be subject to a new periodic cash dividend requirement,as well as a periodic commitment fee to be agreed upon with Treasury in consultation with the Chairman of the Federal Reserve.See MD&A-Regulation and Supervision and Note 2 for additional information on the Purchase Agreement,senior preferred stock,and warrant and Risk Factors-Conservatorship and Related Matters for related risks.The graphs below show our net worth,the liquidation preference of the senior preferred stock,the remaining amount of Treasurys funding commitment to us,the cumulative senior preferred stock dividends we have paid to Treasury,and the cumulative funds we have drawn from Treasury pursuant to its funding commitment.Net Worth,Liquidation Preference,and Treasury Funding Commitment(In billions)$47.7$117.3$140.2Net worthSenior preferred stock liquidation preferenceRemaining Treasury funding commitmentAs of December 31,2023Draws and Dividend Payments(In billions)$71.6$119.7Cumulative draws from TreasuryCumulative dividend payments to TreasuryAs of December 31,2023IntroductionAbout Freddie MacFREDDIE MAC|2023 Form 10-K5OUR BUSINESSPrimary Business StrategiesFreddie Macs overall strategic direction is established by management and affirmed by the Board of Directors and FHFA through the approval of our Strategic Framework,which sets forth our strategic priorities and generally covers a three-year timeframe.FHFA,the Administration,or Congress could take actions that cause us to alter our Strategic Framework.FHFA,as Conservator,has influenced,and may in the future influence,our strategic direction,such as through our new initiatives,credit and pricing policies,and capital,liquidity,and risk appetite constraints.Our Charter and MissionWe are a GSE with a specific and limited corporate purpose to support the liquidity,stability,and affordability of the U.S.housing market as a participant in the secondary mortgage market,while operating as a commercial enterprise earning an appropriate return.All actions we take must be conducted within the constraints of our Charter.As a result,our Charter forms the framework for our business activities.Pursuant to our Charter,our role in the secondary mortgage market is to:n Provide stability in the secondary mortgage market for residential loans;n Respond appropriately to the private capital market;n Provide ongoing assistance to the secondary mortgage market for residential loans(including activities relating to loans for low-and moderate-income families involving a reasonable economic return that may be less than the return earned on other activities)by increasing the liquidity of mortgage investments and improving the distribution of investment capital available for residential mortgage financing;andn Promote access to mortgage loan credit throughout the United States(including central cities,rural areas,and other underserved areas)by increasing the liquidity of mortgage investments and improving the distribution of investment capital available for residential mortgage financing.Our Charter requires certain specified credit protections,which include mortgage insurance from a qualified insurer on the portion of the UPB of the loan that exceeds an 80%LTV ratio,a sellers agreement to repurchase or replace a defaulted loan,or the retention by the seller of at least a 10%participation interest in the loan for the purchase of first-lien single-family loans with LTV ratios at the time of purchase of greater than 80%.This Charter requirement does not apply to multifamily loans or to loans that have the benefit of any guarantee,insurance,or other obligation by the U.S.or any of its agencies or instrumentalities(e.g.,the FHA,VA,or USDA Rural Development).Our Charter does not permit us to originate mortgage loans or lend money directly to mortgage borrowers in the primary mortgage market.Our Charter limits our purchase of single-family loans to the conforming loan market,which consists of loans originated with UPBs at or below limits determined annually based on changes in FHFAs housing price index.In most of the U.S.,the maximum conforming loan limit for a one-family residence has been set at$766,550 for 2024,an increase from$726,200 for 2023,$647,200 in 2022,and$548,250 for 2021.Higher limits have been established in certain high-cost areas(for 2024,up to$1,149,825 for a one-family residence).Higher limits also apply to two-to four-family residences and to one-to four-family residences in Alaska,Guam,Hawaii,and the U.S.Virgin Islands.IntroductionOur BusinessFREDDIE MAC|2023 Form 10-K6Our Strategic PrioritiesWe have four strategic priorities,each of which was created to ensure we fully serve our mission:n Deliver on affordable housing;n Identify,assess,and manage our risks;n Grow,develop,and empower talent for today and tomorrow;andn Build financial strength to serve our mission.These strategic priorities help us create a more liquid,stable,affordable,and equitable housing finance system that serves lenders,families,and the housing market as a whole.And,as with any mission-driven company,our people are at the center of all we do.IntroductionOur BusinessFREDDIE MAC|2023 Form 10-K7Human Capital ManagementAttracting,Developing,and Retaining TalentOur employees are integral to our companys success.Our goal is to sustain an inclusive and equitable culture with a highly engaged,diverse workforce so that we can support the U.S.housing industry and make home possible.We strive to be an employer of choice that attracts and retains top talent through our commitment to DEI,employee well-being and engagement,training,and other professional development opportunities.We are committed to promoting DEI in our organization and business practices.We strive to create a culture where people feel comfortable being their authentic selves in the workplace.We do this through various programs,such as our 10 Business Resource Groups,which provide all employees a place to find community and targeted professional development opportunities.We encourage employees to volunteer and engage in community outreach in the neighborhoods where they work and live through our Community Crew program,which focuses on mission-related activities and our SERVE program which provides our employees with additional volunteer opportunities with local organizations.We aim to support our employees overall well-being and enable them to perform at their best.Our wide variety of benefits provide employees with flexibility to manage their lives at home and work.We also offer a variety of ways to help our employees plan for their financial well-being.In 2023,we enhanced our vacation and first-time homebuyer benefits,introduced caregiver leave,added more flexibility for hybrid employees,and enhanced our benefits for LGBTQ employees.In 2024,we are expanding our caregiving and bereavement leave and introducing new bereavement support services.We encourage and support professional development to help our employees stay engaged,confident,and credible.Our professional development opportunities include in-person and virtual courses on various topics,such as leadership,business,communications,and technology skill development;our educational assistance program;our student debt repayment program;and our rewards programs for employees to recognize and celebrate their colleagues achievements.We also strive to implement competitive compensation programs and practices within the constraints of the conservatorship.We evaluate the success of our human capital management by measuring and monitoring the performance,development,and retention of our employees.EmployeesAt January 31,2024,we had 8,004 full-time and 31part-time employees.Our employee population increased in 2023 and our voluntary turnover rate decreased and returned to pre-COVID-19 levels,which is below financial industry benchmarks for voluntary turnover and is more consistent with historical experience.Our headquarters are in McLean,Virginia,and the majority of our employees reside in the Washington,D.C.metropolitan area.Board and FHFA OversightWe engage with the CHC Committee by providing workforce insights that support their oversight of compensation and benefits,DEI,talent development and strategies to strengthen our culture.Although the CHC Committee plays a significant role in these matters,FHFA is actively involved in its role as both our conservator and regulator.For additional information,see Directors,Corporate Governance,and Executive Officers-Corporate Governance-Board of Directors and Board Committee Information-Authority of the Board of Directors and Board Committees.DEIWe believe a strong commitment to DEI creates a stronger Freddie Mac that is better positioned to serve our mission effectively and advance equity in the housing industry.The DEI Division promotes DEI in all aspects of our business and at every level of the organization.Freddie Mac has a three-year Board-approved DEI strategic plan that establishes our efforts into focus areas that are organized into four components:workforce diversity,supplier diversity,financial transactions,and engagement and outreach.Each focus area has associated goals that are tracked and shared with FHFA,our Board of Directors,our senior operating committee,and our people.For workforce diversity,we attract a pipeline of diverse candidates by partnering with Hispanic Serving Institutions,Historically Black Colleges and Universities,and other talent organizations.We also provide access to professional development and learning opportunities,formal training programs,mentoring initiatives,and other DEI-related programming.Our DEI efforts are reflected in the composition of our workforce,leadership,and Board of Directors.For example,we are a majority-minority company,which means more than 50%of our workforce identifies as racially or ethnically diverse,and 40%of our senior operating committee identifies as racially or ethnically diverse.For information on the composition of our Board of Directors,see Directors,Corporate Governance,and Executive Officers Directors Director Criteria,Diversity,Qualifications,Experience,and Tenure.IntroductionOur BusinessFREDDIE MAC|2023 Form 10-K8Our efforts for supplier diversity include:nInvolving diverse suppliers in our competitive bidding process andnEstablishing a program to understand how our primary suppliers use diverse suppliers.Our efforts for financial transactions involve:nEngaging minority-,women-,and disabled-owned businesses(MWDOBs)in our capital market transactions andnProviding training,access,and opportunities to better position MWDOBs for future opportunities with our company,including our Single-Family and Multifamily businesses.Our efforts for engagement and outreach include:nCreating sustainable impact within the Freddie Mac community through our 10 Business Resource Groups and in local communities through Community Crew,our employee volunteerism and matching gifts program.Business SegmentsWe have two reportable segments:Single-Family and Multifamily.For additional information on our segments,see MD&A-Our Business Segments and Note14.PropertiesOur principal offices consist of four office buildings we own in McLean,Virginia,comprising approximately 1.3 million square feet.We operate our business in the United Statesand its territories,and accordingly,we generate no revenue from and have no long-lived assets,other than financial instruments,in geographic locations other than the United Statesand its territories.Government Regulation and SupervisionOur business is subject to extensive laws,regulations,and supervision.The laws and regulations to which we are subject cover all key aspects of our business,and directly and indirectly impact the key drivers of our results including,for example,our product offerings,guarantee fees,pricing,competitive position and strategic priorities,relationship with sellers and servicers,capital structure,cash needs and uses,liquidity,privacy for borrowers and others,risk management,cybersecurity,and costs of compliance.Failure to comply with our legal and regulatory requirements could result in litigation,investigations,enforcement actions,fines,monetary and other penalties,and harm to our reputation.Our business and results of operations may also be directly and adversely affected by future legislative,regulatory,or judicial actions.Such actions could affect us in a number of ways,including by imposing significant additional legal,compliance,and other costs on us and limiting our business activities.For example,changes to our capital requirements have affected our business and risk management strategies,including our risk appetite,our risk-adjusted returns,and the impact of our CRT transactions on our capital needs,and have increased the amount of capital we will be required to retain or raise to exit from conservatorship.In addition,our conservatorship and related matters significantly affect our management,business activities,financial condition,and results of operations.We are under the control of FHFA,as our Conservator,and are not managed to maximize stockholder returns.FHFA determines our strategic direction.We face a variety of different,and sometimes competing,business objectives and FHFA-mandated activities.FHFA has required us to make changes to our business that have adversely affected our financial results and could require us to make additional changes at any time.FHFA may require us to undertake activities that reduce our profitability,expose us to additional credit,market,funding,operational,legal,and other risks,or provide additional support for the mortgage market that serves our mission but adversely affects our financial results.Further,we can be put into receivership at the discretion of the Director of FHFA at any time for a number of reasons set forth in the GSE Act.FHFA is also Conservator of Fannie Mae,our primary competitor.FHFAs actions,as Conservator of both companies,could affect competition between us.It is also possible that FHFA could require us and Fannie Mae to take a uniform approach to certain activities,limiting innovation and competition,and possibly putting us at a competitive disadvantage because of differences in our respective businesses.FHFA also could limit our ability to compete with new entrants and other institutions.For additional information on conservatorship and related risks,see Introduction About Freddie Mac Conservatorship and Government Support for Our Business and Risk Factors Conservatorship and Related Matters.For additional information on government regulation and supervision and related risks,see MD&A-Regulation and Supervision and Risk Factors-Legal and Compliance Risks.IntroductionOur BusinessFREDDIE MAC|2023 Form 10-K9Available InformationWe file reports and other information with the SEC.In view of the Conservators succession to all of the voting power of our stockholders,we have not prepared or provided proxy statements for the solicitation of proxies from stockholders since we entered into conservatorship,and do not expect to do so while we remain in conservatorship.Pursuant to SEC rules,our annual reports on Form 10-K contain certain information typically provided in an annual proxy statement.We make available,free of charge through our website at annual reports on Form10-K,quarterly reports on Form10-Q,current reports on Form8-K,and all other SEC reports and amendments to those reports as soon as reasonably practicable after we electronically file the material with the SEC.The SEC also maintains a website(www.sec.gov)that contains reports,proxy and information statements,and other information regarding companies that file electronically with the SEC.We are providing our website addresses and the website address of the SEC here and elsewhere in this Form 10-K solely for your information.Information appearing on our website or on the SECs website is not incorporated into this Form 10-K.We provide information on the ERCF on our website at provide disclosure about our debt securities on our website at this address,investors can access the offering circular and related supplements for debt securities offerings under Freddie Macs global debt facility,including pricing supplements for individual issuances of debt securities.Similar information about our STACR transactions and SCR transactions is available at and provide disclosure about our mortgage-related securities,some of which are off-balance sheet obligations(e.g.,K Certificates),on our website at and these addresses,investors can access information and documents,including offering circulars and offering circular supplements,for mortgage-related securities offerings.We provide additional information,including product descriptions,investor presentations,securities issuance calendars,transaction volumes and details,redemption notices,Freddie Mac research,and material developments or other events that may be important to investors,in each case as applicable,on the websites for our business divisions,which can be found at ,and provide information on our sustainability efforts on our website at BusinessFREDDIE MAC|2023 Form 10-K10FORWARD-LOOKING STATEMENTSWe regularly communicate information concerning our business activities to investors,the news media,securities analysts,and others as part of our normal operations.Some of these communications,including this Form10-K,contain forward-looking statements.Examples of forward-looking statements include,but are not limited to,statements pertaining to the conservatorship,our current expectations and objectives for the Single-Family and Multifamily segments of our business,our efforts to assist the housing market,our liquidity and capital management,economic and market conditions and trends including,but not limited to,changes in house prices and house price forecasts,our market share,the effect of legislative and regulatory developments and new accounting guidance,the credit quality of loans we own or guarantee,the costs and benefits of our CRT transactions,the impact of banking crises or failures,the effects of catastrophic events or significant climate change effects and actions taken in response thereto on our business,and our results of operations and financial condition.Forward-looking statements involve known and unknown risks and uncertainties,some of which are beyond our control.Forward-looking statements are often accompanied by,and identified with,terms such as could,may,will,believe,expect,anticipate,forecast,and similar phrases.These statements are not historical facts,but rather represent our expectations based on current information,plans,judgments,assumptions,estimates,and projections.Actual results may differ significantly from those described in or implied by such forward-looking statements due to various factors and uncertainties,including those described in the Risk Factors section of this Form 10-K and:n The actions the federal government(including FHFA,Treasury,and Congress)and state governments may take,require us to take,or restrict us from taking,including actions to promote equitable access to affordable and sustainable housing,such as programs to implement the expectations in FHFAs Conservatorship Scorecards,recent requirements and guidance related to equitable housing,and other objectives for us;n Changes in the fiscal and monetary policies of the Federal Reserve,including changes in target interest rates and in the amount of agency MBS and agency CMBS held by the Federal Reserve;n The effect of the restrictions on our business due to the conservatorship and the Purchase Agreement;n The impact of any changes in our credit ratings or those of the U.S.government;n Changes in our Charter,applicable legislative or regulatory requirements(including any legislation affecting the future status of our company),or the Purchase Agreement;n Changes to our capital requirements and potential effects of such changes on our business strategies;n Changes in tax laws;n Changes in privacy and cybersecurity laws and regulations;n Changes in accounting policies,practices,standards,or guidance;n Changes in economic and market conditions,including volatility in the financial services industry,changes in employment rates,inflation,interest rates,spreads,and house prices;n Changes in the U.S.mortgage market,including changes in the supply and type of loan products;n The success of our efforts to mitigate our losses;n The success of our strategy to transfer mortgage credit risk;n Our ability to maintain adequate liquidity to fund our operations;n Our ability to maintain the security and resiliency of our operational systems and infrastructure,including against cybersecurity incidents or other security incidents,whether due to insider error or malfeasance or system errors or vulnerabilities in our or our third parties systems;n Our ability to effectively execute our business strategies,implement significant changes,and improve efficiency;n The adequacy of our risk management framework,including the adequacy of our regulatory capital framework prescribed by FHFA and internal models for measuring risk;n Our ability to manage mortgage credit risk,including the effect of changes in underwriting and servicing practices;n Our ability to limit or manage our economic exposure and GAAP earnings exposure to interest-rate volatility and spread volatility,including the availability of derivative financial instruments needed for interest-rate risk management purposes and our ability to apply hedge accounting;n Our operational ability to issue new securities,make timely and correct payments on securities,and provide initial and ongoing disclosures;n Our reliance on CSS and the CSP for the operation of the majority of our Single-Family securitization activities,limits on our influence over CSS Board decisions,and any additional changes FHFA may require in our relationship with,or support of,CSS;n Performance of and changes in the methodologies,models,assumptions,and estimates we use to prepare our financial statements,make business decisions,and manage risks;n Changes in investor demand for our debt or mortgage-related securities;n Our ability to maintain market acceptance of the UMBS,including our ability to maintain alignment of the prepayment speeds and pricing performance of our and Fannie Maes respective UMBS;IntroductionForward-Looking StatementsFREDDIE MAC|2023 Form 10-K11n Changes in the practices of loan originators,servicers,investors,and other participants in the secondary mortgage market;n Competition from other market participants,which could affect the pricing we offer for our products,the credit characteristics of the loans we purchase,and our ability to meet our affordable housing goals and other mandated activities;n The adverse consequences on our business and operations that may occur from the discontinuance of LIBOR and the transition to SOFR as the replacement;n The availability of critical third parties,or their vendors and other business partners,to deliver products or services,or to manage risks,including cybersecurity risk,effectively;n The occurrence of a catastrophic event or significant climate change effects in areas in which our offices,significant portions of our total mortgage portfolio,or the offices of critical third parties are located,and for which we may be uninsured or significantly underinsured;andnOther factors and assumptions described in this Form10-K,including in the MD&A section.Forward-looking statements are made only as of the date of this Form 10-K,and we undertake no obligation to update any forward-looking statements we make to reflect events or circumstances occurring after the date of this Form10-K.IntroductionForward-Looking StatementsFREDDIE MAC|2023 Form 10-K12Managements Discussion and Analysis of Financial Condition and Results of OperationsHOUSING AND MORTGAGE MARKET CONDITIONSThe following charts present certain housing and mortgage market indicators that can significantly affect our business and financial results.Certain market and macroeconomic prior period data have been updated to reflect revised historical data.For additional information on the effect of these indicators on our business and financial results,see MD&A Consolidated Results of Operations and MD&A Our Business Segments.Single-Family U.S.Single-Family Home Sales and House Prices _ 6,0236,4626,8915,6714,7585,3405,6406,1205,0304,0906838227716416684.4.5.1%4.9%6.6%Sales of existing homes(units in thousands)Sales of new homes(units in thousands)Single-family house price growth rate20192020202120222023Sources:National Association of Realtors,U.S.Census Bureau,and Freddie Mac House Price Index(seasonally adjusted annual rate).U.S.Single-Family Mortgage Originations _(UPB in billions)$2,325$4,100$4,440$2,325$1,3803.74%2.67%3.11%6.42%6.61%U.S.single-family originations30-year PMMS rate20192020202120222023Source:Inside Mortgage Finance.Single-Family Serious Delinquency Rates as of December 31,1.81%5.16%2.83%1.89%1.52%0.63%2.64%1.12%0.66%0.55%Total mortgage marketFreddie Mac20192020202120222023Source:National Delinquency Survey from the Mortgage Bankers Association.For 2023,the total mortgage market rate is as of September 30,2023(latest available information).Single-Family Mortgage Debt Outstanding(UPB in trillions)$2.0$2.3$2.8$3.0$3.0$11.2$11.7$12.8$13.6$13.9Freddie Mac Single-Family mortgage portfolioU.S.single-family mortgage debt outstanding20192020202120222023Source:Freddie Mac and Federal Reserve Financial Accounts of the United States of America.For 2023,the U.S.single-family mortgage debt outstanding balance is as of September 30,2023(latest available information).Managements Discussion and AnalysisHousing and Mortgage Market Conditions FREDDIE MAC|2023 Form 10-K13MultifamilyApartment Vacancy Rates and Change in Effective Rents 4.7%5.4%4.9%4.9%5.4%3.5%(2.7).9.1%(1.7)%3.1%Apartment vacancy rates(as of December 31)Change in effective rents(for the year ended December 31)Annual long-term effective rent growth(2000-2023)20192020202120222023Source:Reis.Multifamily Property Price Growth Rate8.8%7.0.0%0.4%(8.4) 192020202120222023Source:Real Capital Analytics Commercial Property Price Index(RCA CPPI).Multifamily Delinquency Rates as of December 31,0.08%0.16%0.08%0.12%0.28%0.91%1.95%1.41%0.84%0.57%0.11%0.27%0.25%0.17%0.29%Freddie Mac(60 day)Multifamily CMBS market(60 day)FDIC insured institutions(90 day)20192020202120222023Source:Freddie Mac,FDIC Quarterly Banking Profile,Intex Solutions,Inc.,and Wells Fargo Securities(Multifamily CMBS conduit market,excluding REOs).For 2023,the delinquency rate for FDIC insured institutions is as of September 30,2023(latest available information).Multifamily Mortgage Debt Outstanding(UPB in billions)$341$388$415$429$441$1,622$1,755$1,910$2,075$2,164Freddie Mac Multifamily mortgage portfolioU.S.multifamily mortgage debt outstanding20192020202120222023Source:Freddie Mac and Federal Reserve Financial Accounts of the United States of America.For 2023,the U.S.multifamily mortgage debt outstanding balance is as of September 30,2023(latest available information).Managements Discussion and AnalysisHousing and Mortgage Market ConditionsFREDDIE MAC|2023 Form 10-K14CONSOLIDATED RESULTS OF OPERATIONSThis discussion of our consolidated results of operations should be read in conjunction with our consolidated financial statements and accompanying notes.Our financial results and business volumes could be negatively affected by adverse changes in the housing market or economic conditions,including volatility and stress within the banking sector and the measures governments and financial services companies take in response.Stress in U.S.regional banks and non-depository institutions could drive elevated counterparty credit risk and indirect risk due to financing or banking relationships that our counterparties have with the affected banking organizations.We could also experience declines in liquidity in the markets for our securities as a result of any such adverse changes or regulatory responses to adverse changes.See Risk Factors for additional information.The table below compares our consolidated results of operations for the past three years.Table 1-Summary of Consolidated Statements of Income and Comprehensive IncomeYear Over Year ChangeYear Ended December 31,2023 vs.20222022 vs.2021(Dollars in millions)202320222021$%$%Net interest income$18,542$18,005$17,580$537 3%$425 2%Non-interest income 2,687 3,259 4,371 (572)(18)(1,112)(25)Net revenues 21,229 21,264 21,951 (35)(687)(3)(Provision)benefit for credit losses 872 (1,841)1,041 2,713 147 (2,882)(277)Non-interest expense(8,902)(7,819)(7,793)(1,083)(14)(26)Income before income tax expense 13,199 11,604 15,199 1,595 14 (3,595)(24)Income tax expense(2,661)(2,277)(3,090)(384)(17)813 26 Net income 10,538 9,327 12,109 1,211 13 (2,782)(23)Other comprehensive income(loss),net of taxes and reclassification adjustments 166 (342)(489)508 149 147 30 Comprehensive income$10,704$8,985$11,620$1,719 19%($2,635)(23)%See MD&A-Critical Accounting Estimates for information concerning certain significant accounting policies and estimates applied in determining our reported results of operations and Note 1 for a summary of our accounting policies and the related notes in which information about them can be found.Net RevenuesNet Interest IncomeNet interest income primarily consists of guarantee net interest income in Single-Family.We consolidate most of our Single-Family securitization trusts and,therefore,we recognize the loans held by the trust and the debt securities issued by the trust on our consolidated balance sheets.The difference between the interest income on these loans and the interest expense on the related debt securities primarily represents the guarantee fees we receive as compensation for our guarantee of the principal and interest payments of the issued debt securities.Guarantee net interest income includes two components:n Contractual net interest income,which represents the ongoing monthly guarantee fee we receive for managing the credit risk associated with mortgage loans held by consolidated trusts,including the legislated guarantee fees that we are required to remit to Treasury andn Deferred fee income,which primarily consists of recognition of premiums and discounts on mortgage loans and debt of consolidated trusts and the fees that we receive or pay when we acquire single-family loans.These amounts are recognized in net interest income based on the effective yield over the contractual life of the associated financial instrument and may vary significantly from period to period,primarily based on changes in actual prepayments on the underlying loans.Net interest income also includes investments net interest income,which primarily consists of the difference between the interest income earned on the assets in our investments portfolio and the interest expense incurred on the liabilities used to fund those assets,and the impact on net interest income from hedge accounting,which primarily consists of amortization of previously deferred hedge accounting basis adjustments and the earnings mismatch on qualifying fair value hedge relationships.See Note 9 for additional information on hedge accounting.Managements Discussion and AnalysisConsolidated Results of Operations FREDDIE MAC|2023 Form 10-K15The table below presents the components of net interest income.Table 2-Components of Net Interest IncomeYear Over Year ChangeYear Ended December 31,2023 vs.20222022 vs.2021(Dollars in millions)202320222021$%$%Guarantee net interest income:Contractual net interest income$14,753$14,020$11,038$733 5%$2,982 27ferred fee income 1,012 2,984 4,969 (1,972)(66)(1,985)(40)Total guarantee net interest income 15,765 17,004 16,007 (1,239)(7)997 6Investments net interest income 6,280 3,417 3,068 2,863 84 349 11Impact on net interest income from hedge accounting(3,503)(2,416)(1,495)(1,087)(45)(921)(62)Net interest income$18,542$18,005$17,580$537 3%$425 2%Key Drivers:nGuarantee net interest incomel 2023 vs.2022-Decreased primarily due to a decline in deferred fee income due to slower prepayments as a result of higher mortgage interest rates,partially offset by continued mortgage portfolio growth.l 2022 vs.2021-Increased primarily due to continued mortgage portfolio growth and higher average portfolio guarantee fee rates,partially offset by lower deferred fee income due to slower prepayments as a result of higher mortgage interest rates.nInvestments net interest incomel 2023 vs.2022 and 2022 vs.2021-Increased primarily due to higher returns on securities purchased under agreements to resell as a result of higher short-term interest rates.nImpact on net interest income from hedge accountingl 2023 vs.2022-Expense increased primarily due to higher interest expense on derivatives in hedge relationships as a result of higher interest rates,partially offset by a favorable change in the earnings mismatch on qualifying fair value hedge relationships.l 2022 vs.2021-Expense increased primarily due to higher interest expense on derivatives in hedging relationships as a result of higher interest rates.This increase was partially offset by lower amortization of hedge accounting-related basis adjustments driven by a lower unamortized balance.Managements Discussion and AnalysisConsolidated Results of Operations FREDDIE MAC|2023 Form 10-K16Net Interest Yield AnalysisThe table below presents an analysis of interest-earning assets and interest-bearing liabilities.To calculate the average balances,we generally use a daily weighted average of amortized cost.When daily average balance information is not available,such as for mortgage loans,we use monthly averages.Mortgage loans on non-accrual status,where interest income is generally recognized when collected,are included in the average balances.Table 3-Analysis of Net Interest YieldYear Ended December 31,202320222021(Dollars in millions)AverageBalanceInterestIncome(Expense)AverageRateAverageBalanceInterestIncome(Expense)AverageRateAverageBalanceInterestIncome(Expense)AverageRateInterest-earning assets:Cash and cash equivalents$13,466$532 3.95%$14,705$179 1.22%$62,042$8 0.01%Securities purchased under agreements to resell 118,579 6,135 5.17 97,260 1,718 1.77 75,425 48 0.06 Investment securities 40,481 1,571 3.88 47,612 1,640 3.44 56,211 2,261 4.02 Mortgage loans(1)3,061,638 96,985 3.17 2,967,147 79,826 2.69 2,622,952 59,130 2.25 Other assets 2,479 140 5.65 4,104 95 2.31 6,049 80 1.32 Total interest-earning assets 3,236,643 105,363 3.25 3,130,828 83,458 2.67 2,822,679 61,527 2.18 Interest-bearing liabilities:Debt of consolidated trusts 2,997,841 (76,703)(2.56)2,911,235 (61,404)(2.11)2,538,757 (42,209)(1.66)Debt of Freddie Mac 192,510 (10,118)(5.26)178,757 (4,049)(2.27)237,572 (1,738)(0.73)Total interest-bearing liabilities 3,190,351 (86,821)(2.72)3,089,992 (65,453)(2.12)2,776,329 (43,947)(1.58)Impact of net non-interest-bearing funding 46,292 0.04 40,836 0.03 46,350 0.02 Total funding of interest-earning assets 3,236,643 (86,821)(2.68)3,130,828 (65,453)(2.09)2,822,679 (43,947)(1.56)Net interest income/yield$18,542 0.57%$18,005 0.58%$17,580 0.62%(1)Loan fees included in interest income were$1.1 billion,$1.5 billion,and$3.1 billion during 2023,2022,and 2021,respectively.Managements Discussion and AnalysisConsolidated Results of Operations FREDDIE MAC|2023 Form 10-K17Net Interest Income Rate/Volume AnalysisThe table below presents a rate and volume analysis of our net interest income.Our net interest income reflects the reversal of interest income accrued,net of interest received on a cash basis,related to mortgage loans that are on non-accrual status.Table 4-Net Interest Income Rate/Volume AnalysisVariance Analysis2023 vs.20222022 vs.2021(In millions)Rate(1)Volume(1)Total ChangeRate(1)Volume(1)Total ChangeInterest-earning assets:Cash and cash equivalents$361 ($8)$353$180 ($8)$172 Securities purchased under agreements to resell 3,775 642 4,417 1,649 21 1,670 Investment securities 127 (196)(69)292 (913)(621)Mortgage loans 14,505 2,654 17,159 12,572 8,124 20,696 Other assets 98 (53)45 45 (31)14 Total interest-earning assets 18,866 3,039 21,905 14,738 7,193 21,931 Interest-bearing liabilities:Debt of consolidated trusts(13,058)(2,241)(15,299)(11,448)(7,747)(19,195)Debt of Freddie Mac(5,726)(343)(6,069)(2,925)614 (2,311)Total interest-bearing liabilities(18,784)(2,584)(21,368)(14,373)(7,133)(21,506)Net interest income$82$455$537$365$60$425(1)The total change variances are allocated between rate and volume based on the relative size of each variance.Non-Interest IncomeNon-interest income primarily consists of guarantee income and investment gains,net.Guarantee income relates primarily to our Multifamily senior subordinate securitizations.We do not consolidate the trusts used in these transactions and therefore do not recognize the loans held by the trust or the debt securities issued by the trust on our consolidated balance sheets.Rather,we separately account for our guarantee to the trust and recognize the revenue from our guarantee as guarantee income.Guarantee income includes the amortization of our guarantee obligation as we are released from risk under our guarantee and changes in fair value of our guarantee assets,net of contractual guarantee fees received.Net investment gains primarily consist of the gains on sale of mortgage loans from our multifamily loan purchase and securitization activities.Because we do not consolidate our Multifamily senior subordinate securitization trusts,we account for these transactions as sales of the underlying loans.Net investment gains also include revenues from sales of single-family delinquent and reperforming loans and gains and losses on investment securities.These amounts are shown net of gains and losses from the related debt funding and interest-rate risk management activities,as applicable.Net investment gains can vary significantly from period-to-period based on the pricing of our new multifamily loan purchases,the volume and nature of our investment,funding,and hedging activities,and changes in market conditions,such as interest rates and market spreads.Derivative instruments are a key component of our interest-rate risk management strategy.We use derivatives to economically hedge the interest-rate risk of our financial assets and liabilities and manage our exposure to interest-rate risk on an economic basis to a low level as measured by our models.We align our derivative portfolio to economically hedge the changing duration of our assets and liabilities and apply fair value hedge accounting to certain single-family mortgage loans and debt to reduce our GAAP earnings variability.As a result,interest-rate-related fair value gains and losses that we recognize on financial instruments that we measure at fair value generally have offsetting impacts from the derivative instruments that we use to economically hedge interest-rate risk.For additional information about our interest-rate risk management activities and the sensitivity of reported GAAP earnings to those activities,see MD&A-Risk Management-Market Risk.For additional information on derivative instruments,see Note 9.Managements Discussion and AnalysisConsolidated Results of Operations FREDDIE MAC|2023 Form 10-K18The table below presents the components of non-interest income.Table 5-Components of Non-Interest IncomeYear Over Year ChangeYear Ended December 31,2023 vs.20222022 vs.2021(Dollars in millions)202320222021$%$%Guarantee income$1,615$783$1,032$832 106%($249)(24)%Investment gains,net 707 1,969 2,746 (1,262)(64)(777)(28)Other income 365 507 593 (142)(28)(86)(15)Non-interest income$2,687$3,259$4,371 ($572)(18)%($1,112)(25)%Key Drivers:n Guarantee incomel 2023 vs.2022-Increased primarily due to lower fair value losses on guarantee assets as a result of lower medium-term interest rates.l 2022 vs.2021-Decreased primarily due to higher fair value losses on guarantee assets as a result of higher interest rates.n Investment gains,netl 2023 vs.2022-Net investment gains declined,as the prior year period included spread-related gains on commitments to hedge the Single-Family securitization pipeline that did not recur in 2023.l2022 vs.2021-Decreased primarily due to lower gains in Multifamily driven by spread widening as well as a decline in revenue from held-for-sale loan purchase and securitization activity as a result of lower volumes and lower margins.This decrease was partially offset by spread-related gains on commitments to hedge the Single-Family securitization pipeline in 2022.(Provision)Benefit for Credit LossesOur provision for credit losses relates primarily to single-family loans held-for-investment and can vary substantially from period to period based on a number of factors,such as changes in house prices and house price forecasts,changes in interest rates,borrower prepayments and delinquency rates,events such as pandemics,the type and volume of our loss mitigation and foreclosure activity,and government assistance provided to borrowers.See MD&A-Critical Accounting Estimates for additional information.The table below presents the components of provision for credit losses.Table 6-(Provision)Benefit for Credit LossesYear Over Year ChangeYear Ended December 31,2023 vs.20222022 vs.2021(Dollars in millions)202320222021$%$%Single-Family$1,172 ($1,772)$919$2,944 166%($2,691)(293)%Multifamily(300)(69)122 (231)(335)(191)(157)(Provision)benefit for credit losses$872 ($1,841)$1,041$2,713 147%($2,882)(277)%Key Drivers:n 2023 vs.2022-The benefit for credit losses for 2023 was primarily driven by a credit reserve release in Single-Family due to improvements in house prices.n 2022 vs.2021-The provision for credit losses for 2022 was primarily driven by a credit reserve build in Single-Family due to deterioration in house prices.Managements Discussion and AnalysisConsolidated Results of Operations FREDDIE MAC|2023 Form 10-K19Non-Interest Expense Non-interest expense consists of salaries and employee benefits,credit enhancement expense and benefit for credit enhancement recoveries,legislative assessments expense,and other expenses we incur to run our business.Credit enhancement expense includes the premiums and other costs related to certain CRT transactions that are accounted for as freestanding contracts,primarily STACR and ACIS transactions in Single-Family.Benefit for credit enhancement recoveries primarily represents changes in expected recoveries from those transactions.We recognize expected recoveries from freestanding credit enhancements at the same time that we recognize an allowance for credit losses on the covered loans,measured on the same basis as the allowance for credit losses on the covered loans.Legislative assessments expense relates to two fees:(1)the legislated guarantee fees on single-family loans that we are required to remit to Treasury and(2)the fee imposed on Freddie Macs total new business purchases that is allocated to certain affordable housing funds and remitted to Treasury and HUD.The legislated guarantee fees relate to the 10 bps increase in guarantee fees implemented at the direction of FHFA pursuant to the Temporary Payroll Tax Cut Continuation Act of 2011 as extended by the Infrastructure Investment and Jobs Act of 2021.The affordable housing funds allocation relates to the GSE Act requirement to set aside in each fiscal year an amount equal to 4.2 bps of each dollar of total new business purchases,and pay such amount to certain housing funds.We are prohibited from passing through the costs of the affordable housing funds allocation to the originators of the loans that we purchase.The table below presents the components of non-interest expense.Table 7-Components of Non-Interest ExpenseYear Over Year ChangeYear Ended December 31,2023 vs.20222022 vs.2021(Dollars in millions)202320222021$%$%Salaries and employee benefits($1,606)($1,509)($1,398)($97)(6)%($111)(8)%Credit enhancement expense(2,339)(2,118)(1,518)(221)(10)(600)(40)Benefit for(decrease in)credit enhancement recoveries(189)236 (542)(425)(180)778 144 Legislative assessments expense:Legislated guarantee fees expense(2,856)(2,751)(2,343)(105)(4)(408)(17)Affordable housing funds allocation(146)(258)(539)112 43 281 52 Total legislative assessments expense(3,002)(3,009)(2,882)7 (127)(4)Other expense(1,766)(1,419)(1,453)(347)(24)34 2 Non-interest expense($8,902)($7,819)($7,793)($1,083)(14)%($26)%Key Drivers:n Credit enhancement expense l 2023 vs.2022-Increased primarily due to a higher volume of outstanding cumulative CRT transactions and higher losses on STACR Trust note repurchases.l2022 vs.2021-Increased primarily due to a higher volume of outstanding cumulative CRT transactions and higher spreads on transactions executed during 2022.n Benefit for(decrease in)credit enhancement recoveriesl 2023 vs.2022-Decreased primarily due to a decrease in expected credit losses on covered loans.l 2022 vs 2021-Increased primarily due to an increase in expected credit losses on covered loans.n Other expensel 2023 vs.2022-Increased primarily due to an accrual of$0.3 billion for an adverse judgment at trial.See Note 17 for additional information regarding our legal proceedings.Managements Discussion and AnalysisConsolidated Results of Operations FREDDIE MAC|2023 Form 10-K20CONSOLIDATED BALANCE SHEETS ANALYSISThe table below compares our summarized consolidated balance sheets.Table 8-Summarized Consolidated Balance SheetsDecember 31,Year Over Year Change(Dollars in millions)20232022$%Assets:Cash and cash equivalents$6,019$6,360 ($341)(5)%Securities purchased under agreements to resell 95,148 87,295 7,853 9 Investment securities,at fair value 43,275 38,701 4,574 12 Mortgage loans held-for-sale 12,941 12,197 744 6 Mortgage loans held-for-investment 3,083,665 3,022,318 61,347 2 Accrued interest receivable,net 9,925 8,529 1,396 16 Deferred tax assets,net 4,076 5,777 (1,701)(29)Other assets 25,927 27,156 (1,229)(5)Total assets$3,280,976$3,208,333$72,643 2%Liabilities and Equity:Liabilities:Accrued interest payable$8,812$7,309$1,503 21bt 3,208,346 3,145,832 62,514 2 Other liabilities 16,096 18,174 (2,078)(11)Total liabilities 3,233,254 3,171,315 61,939 2 Total equity 47,722 37,018 10,704 29 Total liabilities and equity$3,280,976$3,208,333$72,643 2%Key Drivers:As of December 31,2023 compared to December 31,2022:n Securities purchased under agreements to resell increased primarily due to investment of retained earnings.n Investment securities increased primarily due to an increase in purchases of U.S.Treasury securities.n Mortgage loans held-for-investment increased primarily due to growth in our Single-Family mortgage portfolio.n Debt increased primarily due to an increase in debt of consolidated trusts driven by growth in our Single-Family mortgage portfolio.Managements Discussion and AnalysisConsolidated Balance Sheets AnalysisFREDDIE MAC|2023 Form 10-K21OUR PORTFOLIOSMortgage PortfolioOur mortgage portfolio includes assets held by both business segments and consists of mortgage loans held-for-investment,mortgage loans held-for-sale,and mortgage loans underlying our mortgage-related guarantees.See Note 4 for additional information on our mortgage loans and Note 5 for additional information on our mortgage-related guarantees.The table below presents the UPB of our mortgage portfolio by segment.Table 9-Mortgage PortfolioDecember 31,2023December 31,2022(In millions)Single-FamilyMultifamilyTotalSingle-FamilyMultifamilyTotalMortgage loans held-for-investment:By consolidated trusts$2,963,296$47,433$3,010,729$2,907,999$30,574$2,938,573By Freddie Mac33,21311,77044,98333,50617,80551,311Total mortgage loans held-for-investment 2,996,509 59,203 3,055,712 2,941,505 48,379 2,989,884 Mortgage loans held-for-sale 3,527 9,905 13,432 3,564 9,544 13,108 Total mortgage loans 3,000,036 69,108 3,069,144 2,945,069 57,923 3,002,992 Mortgage-related guarantees:Mortgage loans held by nonconsolidated trusts 30,182 360,928 391,110 31,500 360,869 392,369 Other mortgage-related guarantees 8,692 10,761 19,453 9,476 10,510 19,986 Total mortgage-related guarantees 38,874 371,689 410,563 40,976 371,379 412,355 Total mortgage portfolio$3,038,910$440,797$3,479,707$2,986,045$429,302$3,415,347 Guaranteed mortgage-related securities:Issued by consolidated trusts$2,970,707$47,436$3,018,143$2,916,038$30,813$2,946,851Issued by non-consolidated trusts24,600321,262345,86225,772319,117344,889Total guaranteed mortgage-related securities$2,995,307$368,698$3,364,005$2,941,810$349,930$3,291,740 Investments PortfolioOur investments portfolio consists of our mortgage-related investments portfolio and other investments portfolio.Mortgage-Related Investments PortfolioWe primarily use our mortgage-related investments portfolio to provide liquidity to the mortgage market and support our loss mitigation activities.Our mortgage-related investments portfolio includes assets held by both business segments and consists of unsecuritized mortgage loans and mortgage-related securities.We primarily invest in mortgage-related securities that we issue or guarantee,although we may also invest in other agency mortgage-related securities.The Purchase Agreement limits the size of our mortgage-related investments portfolio to a maximum amount of$225 billion effective December 31,2022.The calculation of mortgage assets subject to the Purchase Agreement cap includes the UPB of mortgage assets and 10%of the notional value of interest-only securities.We are also subject to additional limitations on the size and composition of our mortgage-related investments portfolio pursuant to FHFA guidance.For additional information on the restrictions on our mortgage-related investments portfolio,see MD&A-Conservatorship and Related Matters.Managements Discussion and AnalysisOur PortfoliosFREDDIE MAC|2023 Form 10-K22The table below presents the details of our mortgage-related investments portfolio.Table 10-Mortgage-Related Investments PortfolioDecember 31,2023December 31,2022(In millions)Single-FamilyMultifamilyTotalSingle-FamilyMultifamilyTotalUnsecuritized mortgage loans:Securitization pipeline loans$8,225$15,197$23,422$10,093$22,546$32,639 Other loans(1)28,5156,47834,99326,9774,80331,780Total unsecuritized mortgage loans36,74021,67558,41537,07027,34964,419Mortgage-related securities:Investment securities 2,667 4,613 7,280 3,440 6,396 9,836Debt of consolidated trusts 18,639 660 19,299 17,939 536 18,475Total mortgage-related securities 21,306 5,273 26,579 21,379 6,932 28,311Mortgage-related investments portfolio$58,046$26,948$84,994$58,449$34,281$92,730 10%of notional amount of interest-only securities$22,186$21,758Mortgage-related investments portfolio for purposes of Purchase Agreement cap107,180114,488(1)Primarily includes delinquent and modified single-family loans that we have purchased from securitization trusts.Other Investments PortfolioOur other investments portfolio,which includes the liquidity and contingency operating portfolio,is primarily used for short-term liquidity management,collateral management,and asset and liability management.The assets in the other investments portfolio are primarily allocated to the Single-Family segment.The table below presents the details of our other investments portfolio.Table 11-Other Investments PortfolioDecember 31,2023December 31,2022(In millions)Liquidity and Contingency Operating PortfolioCustodial AccountOtherTotal Other Investments Portfolio(1)Liquidity and Contingency Operating PortfolioCustodial AccountOtherTotal Other Investments Portfolio(1)Cash and cash equivalents$5,041$890$88$6,019$5,652$611$97$6,360 Securities purchased under agreements to resell 94,904 9,396 1,093 105,393 88,499 9,703 1,084 99,286 Non-mortgage related securities(2)24,153 6,119 30,272 20,188 3,645 23,833 Other assets 5,555 5,555 4,565 4,565 Other investments portfolio$124,098$10,286$12,855$147,239$114,339$10,314$9,391$134,044(1)Represents carrying value.(2)Primarily consists of U.S.Treasury securities.Managements Discussion and AnalysisOur PortfoliosFREDDIE MAC|2023 Form 10-K23OUR BUSINESS SEGMENTSAs shown in the table below,we have two reportable segments,which are based on the way we manage our business.See Note 14 for additional financial information for our reportable segments.SegmentDescriptionSingle-FamilyReflects results from our purchase,securitization,and guarantee of single-family loans,our investments in single-family loans and mortgage-related securities,the management of Single-Family mortgage credit risk and market risk,and any results of our treasury function that are not allocated to each segment.MultifamilyReflects results from our purchase,securitization,and guarantee of multifamily loans,our investments in multifamily loans and mortgage-related securities,and the management of Multifamily mortgage credit risk and market risk.Segment Net Revenues and Net IncomeThe graphs below show our net revenues and net income by segment.Segment Net Revenues(In billions)$22.0$21.3$21.2$17.2$18.8$18.3$4.8$2.5$3.0Single-FamilyMultifamily202120222023Segment Net Income(In billions)$12.1$9.3$10.5$8.8$7.9$9.0$3.3$1.4$1.5Single-FamilyMultifamily202120222023 Managements Discussion and Analysis Our Business SegmentsFREDDIE MAC|2023 Form 10-K24Single-FamilyBusiness Overview Our Single-Family segment provides liquidity and support to the single-family mortgage market through a variety of activities that include the purchase,securitization,and guarantee of single-family loans originated by lenders.Central to our mission is our commitment to helping families attain affordable and sustainable housing and to increasing equitable access to housing finance.The U.S.residential mortgage market consists of a primary mortgage market that links homebuyers and lenders,and a secondary mortgage market that links lenders and investors.The size of the U.S.residential mortgage market is affected by many factors,including changes in interest rates,unemployment rates,homeownership rates,house prices,the supply of housing,lender preferences regarding credit risk,and borrower preferences regarding mortgage debt.In accordance with our Charter,we participate in the secondary mortgage market.The mix of loan products we purchase is affected by several factors,including the volume of loans meeting the requirements of our Charter,the volume meeting our risk appetite and originated according to our purchase standards,and the loan purchase and securitization activity of other financial institutions.Our primary business model is to acquire loans that lenders originate and then pool those loans into guaranteed mortgage-related securities that transfer interest-rate,prepayment,and liquidity risk to investors and can be sold in the capital markets.We consolidate most of our Single-Family securitization trusts and,therefore,we recognize the loans held by such trusts and the debt securities issued by such trusts on our balance sheet and recognize the guarantee fees we receive as net interest income.To reduce our exposure under our guarantees,we transfer credit risk on a portion of our Single-Family mortgage portfolio to the private market in certain instances.The returns we generate from our business activities are primarily derived from the guarantee fees we receive in exchange for providing our guarantee of the principal and interest payments of the issued mortgage-related securities.The diagram below illustrates our primary business model.Products and ActivitiesOur Single-Family business primarily consists of activities related to providing market liquidity by purchasing and securitizing mortgage loans and issuing guaranteed mortgage-related securities,transferring credit risk,performing loss mitigation activities,and investing in mortgage-related and other investments.Certain of our loan products and programs have been designed to address affordability challenges,particularly in underserved markets,while others aim to support housing supply and sustainability efforts.Loan Purchase,Securitization,and Guarantee ActivitiesGuarantor Swap TransactionsOne of the primary ways we acquire mortgage loans and provide liquidity to our Single-Family lender customers is by securitizing loans into guaranteed mortgage-related securities in guarantor swap transactions.Our largest guarantor swap customers are primarily large mortgage banking companies and commercial banks.In these transactions,we purchase mortgage loans from our customers in exchange for a security backed by those same loans,as shown in the diagram below:Managements Discussion and AnalysisOur Business Segments|Single-FamilyFREDDIE MAC|2023 Form 10-K25Cash Window TransactionsIn addition to guarantor swap transactions,another primary way we acquire loans and provide liquidity to our Single-Family lender customers is by purchasing loans for aggregation in our securitization pipeline through our cash window.In these transactions,we purchase mortgage loans from our customers in exchange for cash consideration.We enter into forward commitments with lenders in advance of the loan purchase date to purchase loans through our cash window at a fixed price for our securitization pipeline,allowing lenders to offer borrowers the opportunity to lock in the interest rate on the mortgage prior to loan origination.We refer to the loan as being in our securitization pipeline for the period of time between loan purchase and securitization.We typically economically hedge the market risk exposure of our securitization pipeline by entering into forward sale commitments and obtain permanent financing for the loans in our securitization pipeline after a short aggregation period by securitizing the loans into guaranteed mortgage-related securities and selling the resulting securities to third-party investors,typically through cash auctions.We may also retain certain of these securities in our mortgage-related investments portfolio prior to selling them to third parties.The Purchase Agreement requires us to purchase loans for cash consideration;operate the cash window with non-discriminatory pricing;and comply with directives,regulations,restrictions,and other requirements prescribed by FHFA related to equitable secondary market access by community lenders.The Purchase Agreement also includes restrictions on the volume of our cash window activities,but these requirements have been suspended until six months after Treasury notifies us that such suspension has been terminated.We manage cash window activities in accordance with our risk limits and limitations imposed by FHFA.For additional information about the Purchase Agreement,see MD&A-Conservatorship and Related Matters.Managements Discussion and Analysis Our Business Segments|Single-FamilyFREDDIE MAC|2023 Form 10-K26The diagram below shows the process for acquiring and securitizing loans in our cash window transactions.Advances to LendersWe also provide liquidity to certain lenders through our early funding programs,where we advance funds to lenders for mortgage loans prior to the loans being pooled and securitized generally through our guarantor swap transactions.In some cases,the early funded mortgages are ultimately delivered through cash window purchase transactions.We account for these transactions as advances that are fully collateralized by the mortgage loans and recognize the associated fees as interest income on the advances from the early funding date to the final settlement date.Securitization ProductsWe offer the following types of securitization products to our customers.Level 1 Securitization Products We refer to the securities we issue in guarantor swap transactions and cash window securitizations as Level 1 Securitization Products,which are pass-through securities that represent undivided beneficial interests in trusts that hold pools of loans.We issue the following types of Level 1 Securitization Products:nUMBS-Single-class pass-through securities issued through the CSP with a 55-day payment delay for TBA-eligible fixed-rate mortgage loans.The UMBS is a single(common)security that is issued by either Fannie Mae or us.The UMBS market is designed to enhance the overall liquidity of TBA-eligible Freddie Mac and Fannie Mae securities by supporting their fungibility without regard to which company is the issuer.SIFMA permits UMBS TBA contracts to be settled by delivery of UMBS issued by either Freddie Mac or Fannie Mae under its good-delivery guidelines.n55-day MBS-Single-class pass-through securities issued through the CSP with a 55-day payment delay for non-TBA-eligible fixed-rate mortgage loans.n ARM PCs-Single-class pass-through securities with a 75-day payment delay for ARM products.We do not use the CSP to issue ARM PCs.In prior years,we also issued Gold PCs,which were single-class pass-through securities with a 45-day payment delay for fixed-rate mortgage loans.We discontinued the issuance of Gold PCs in 2019.Existing Gold PCs that are not entirely resecuritized are eligible for exchange into UMBS(for TBA-eligible securities)or 55-day MBS(for non-TBA-eligible securities).All Level 1 Securitization Products we issue are backed only by mortgage loans that we have acquired.We offer(or previously offered)all of the above products through both guarantor swap and cash window programs.Managements Discussion and Analysis Our Business Segments|Single-FamilyFREDDIE MAC|2023 Form 10-K27We also periodically use Level 1 Securitization Products to securitize certain reperforming loans subsequent to purchasing them from the original securities pool,depending on market conditions,business strategy,credit risk considerations,and operational efficiency.When we issue a Level 1 Securitization Product,we retain the credit risk of the underlying mortgage loans by guaranteeing the principal and interest payments of the issued securities and transfer the interest-rate,prepayment,and liquidity risks of those loans to the investors in the securities.For our fixed-rate Level 1 Securitization Products,we guarantee the timely payment of principal and interest.For our ARM PCs,we guarantee the timely payment of the weighted average coupon interest rate for the underlying loans,and we also guarantee the full and final payment of principal,but not the timely payment of principal.In exchange for our guarantee of Level 1 Securitization Products,we receive guarantee fees that are designed to be commensurate with the risks assumed and that we expect will,over the long-term,provide income that exceeds the credit-related and administrative expenses on the underlying loans and also provide a return on the capital that would be needed to support the related credit risk.The guarantee fees charged on new acquisitions generally consist of:n A contractual monthly fee paid as a percentage of the UPB of the underlying loan,including the legislated guarantee fees andn Fees we receive or pay when we acquire a loan,which include credit fees and buy-up and buy-down fees.Credit fees are calculated based on credit risk factors such as the loan product type,loan purpose,LTV ratio,and credit score,and are charged to compensate us for higher levels of risk in some loan products.Buy-up and buy-down fees are payments made or received to buy up or buy down,respectively,the monthly contractual guarantee fee and are paid in conjunction with the formation of a security to provide for a uniform net coupon rate for the mortgage pool underlying the security.In general,we must obtain FHFAs approval to implement significant across-the-board changes to our credit fees.In addition,from time to time,FHFA issues directives or guidance to us affecting the levels of guarantee fees that we may charge.For additional information on recent changes to pricing,see MD&A-Regulation and Supervision-Targeted Pricing Changes to Enterprise Pricing Framework.In order to issue mortgage-related securities,we establish trusts pursuant to our Master Trust Agreements and place the mortgage loans in the trust,which issues securities backed by those mortgage loans.The servicer administers the collection of borrowers payments on their loans and remits the collected funds to us.We administer the distribution of payments to the investors in the mortgage-related securities,net of any applicable guarantee fees.When we securitize mortgage loans using trusts,Freddie Mac typically functions in its capacity as depositor,guarantor,administrator,and trustee of the trusts.We consolidate our Single-Family Level 1 Securitization Product trusts and recognize the mortgage loans held and debt issued by those trusts on our consolidated balance sheets.The difference between the interest income on the loans and the interest expense on the debt primarily represents the guarantee fees we receive as compensation for our guarantee.This amount is referred to as guarantee net interest income.When a borrower prepays a loan that we have securitized,the outstanding balance of the security owned by investors is reduced by the amount of the prepayment.If the borrower becomes delinquent,we continue to make the applicable payments to the investors in the mortgage-related securities pursuant to our guarantee until we purchase the loan out of the securitization trust.We have the option to purchase loans from the trust under certain circumstances(including certain levels of delinquency)at a purchase price equal to the current UPB of the loan,less any outstanding advances of principal that have been previously distributed.At the instruction of FHFA,we purchase loans from trusts when they reach 24 months of delinquency,except for loans that meet certain criteria(e.g.,permanently modified or foreclosure referral),which may be purchased sooner.Many delinquent loans are purchased from trusts before they reach 24 months of delinquency under one of the exceptions provided.We must obtain FHFAs approval to implement changes to our policy to purchase loans from trusts.Other Securitization ProductsWe securitize certain seasoned loans in transactions where we issue guaranteed senior securities and unguaranteed subordinated securities.The collateral for these structures primarily consists of reperforming loans.The unguaranteed subordinated securities absorb first losses on the related loans.After securitization,we do not control the servicing,and the loans are not serviced in accordance with our Guide.In prior years,we offered additional types of securitization products to our customers,including senior subordinate securitizations backed by recently originated loans and other securitization products collateralized by non-Freddie Mac mortgage-related securities.We no longer offer these products on a regular basis and have not entered into these types of transactions recently.Resecuritization Products Resecuritization products represent beneficial interests in pools of Level 1 Securitization Products and certain other types of mortgage assets.We generally create these securities by using Level 1 Securitization Products or our previously issued resecuritization products as the underlying collateral.We leverage the issuance of these securities to expand the range of investors in our mortgage-related securities to include those seeking specific security attributes.Similar to our Level 1 Securitization Products,we guarantee the payment of principal and interest to the investors in our resecuritization products.We do not charge a guarantee fee for these securities if the underlying collateral is already guaranteed by us since no additional Managements Discussion and Analysis Our Business Segments|Single-FamilyFREDDIE MAC|2023 Form 10-K28credit risk is introduced,although we typically receive a transaction fee as compensation for creating the security and future administrative responsibilities.We use the CSP for many of the securities administration activities for our resecuritization products.We have the ability to commingle TBA-eligible Fannie Mae collateral in certain of our resecuritization products.When we resecuritize Fannie Mae securities,which are separately guaranteed by Fannie Mae,in our commingled resecuritization products,our guarantee covers timely payment of principal and interest on such products from the underlying Fannie Mae securities.If Fannie Mae were to fail to make a payment on a Fannie Mae security that we resecuritized,we would be responsible for making the payment.We are required to hold incremental capital for our guarantees of Fannie Mae securities under the ERCF.We also began to charge a fee for any commingled security issued on or after July 1,2022.For additional information on the fees we charge for guaranteeing Fannie Mae securities,see MD&A Regulation and Supervision-Resecuritization Fee for New Issuances of Commingled Securities.All of the cash flows from the collateral underlying our resecuritization products are generally passed through to investors in these securities.We do not issue resecuritization products that have concentrations of credit risk beyond those embedded in the underlying assets.In many of our resecuritization transactions,securities dealers or investors deliver mortgage assets in exchange for the resecuritization product.In certain cases,we may also transfer our own mortgage assets in exchange for the resecuritization product.The diagram below provides a general example of how we create resecuritization products.We offer the following types of resecuritization products:nSingle-class resecuritization products-Involve the direct pass through of all cash flows of the underlying collateral to the beneficial interest holders and include:lSupers-Resecuritizations of UMBS and certain other TBA-eligible mortgage securities.This structure allows commingling of Freddie Mac and Fannie Mae collateral,where newly issued or exchanged UMBS and Supers issued by us or Fannie Mae may be commingled to back Supers issued by us.Fannie Mae also issues Supers.Supers can be backed by:UMBS and/or other Supers issued by us or Fannie Mae;Existing TBA-eligible Fannie Mae MBS and/or Megas;and/or UMBS and Supers that we have issued in exchange for TBA-eligible PCs and Giant PCs that have been delivered to us in response to our offer to exchange 45-day payment delay securities for corresponding 55-day payment delay securities.Managements Discussion and Analysis Our Business Segments|Single-FamilyFREDDIE MAC|2023 Form 10-K29lGiant MBS-Resecuritizations of:Newly issued 55-day MBS and/or Giant MBS and/or55-day MBS and/or Giant MBS that we have issued in exchange for non-TBA-eligible PCs and non-TBA-eligible Giant PCs that have been delivered to us in response to our offer to exchange 45-day payment delay securities for corresponding 55-day payment delay securities.lGiant PCs-Resecuritizations of previously issued PCs or Giant PCs.Although we no longer issue Gold PCs,existing Gold PCs may continue to be resecuritized into Giant PCs.In addition,ARM PCs may continue to be resecuritized into ARM Giant PCs.Fixed-rate Giant PCs are eligible for exchange into Supers(for TBA-eligible securities)or Giant MBS(for non-TBA-eligible securities).nMulticlass resecuritization products lREMICs-Resecuritizations of previously issued mortgage securities that divide all cash flows of the underlying collateral into two or more classes of varying maturities,payment priorities,and coupons.This structure allows commingling of TBA-eligible Freddie Mac and Fannie Mae collateral.lStrips-Resecuritizations of previously issued Level 1 Securitization Products or single-class resecuritization products and issuance of stripped securities,including principal-only and interest-only securities or floating rate and inverse floating rate securities,backed by the cash flows from the underlying collateral.This structure allows commingling of TBA-eligible Freddie Mac and Fannie Mae collateral.Other Mortgage-Related GuaranteesWe previously offered a guarantee on mortgage assets held by third parties,in exchange for guarantee fees,without securitizing those assets.These arrangements,referred to as long-term standby commitments,have obligated us to purchase seriously delinquent loans that are covered by those commitments.From time to time,we have consented to the termination of our long-term standby commitments and simultaneously entered into guarantor swap transactions with the same counterparty,issuing securities backed by many of the same loans.Credit Enhancement ActivitiesTo reduce our credit risk exposure,we engage in various types of credit enhancements,including primary mortgage insurance and CRT transactions.Our Charter requires coverage by specified credit enhancements or participation interests on single-family loans with LTV ratios above 80%at the time of purchase.Most of our loans with LTV ratios above 80%are protected by primary mortgage insurance,which provides loan-level protection against loss up to a specified amount,the premium for which is typically paid by the borrower.Generally,an insured loan must be in default and the borrowers interest in the underlying property must have been extinguished,such as through a short sale or foreclosure sale,before a claim can be filed under a primary mortgage insurance policy.The mortgage insurer has a prescribed period of time within which to process a claim and make a determination as to its validity and amount.We define CRT transactions as those arrangements where we actively transfer the credit risk exposure on mortgages that we own or guarantee.Our CRT transactions are designed to reduce the amount of required capital related to credit risk,to transfer portions of credit losses on groups of previously acquired loans to third-party investors,and to reduce the risk of future losses to us when borrowers default.The costs we incur in exchange for this credit protection effectively reduce our guarantee income from the associated mortgages.We evaluate and update our CRT activities as needed depending on our business strategy,market conditions,and regulatory requirements.Each CRT transaction is designed to transfer a certain portion of the credit risk that we assume for loans with certain targeted characteristics.Risk positions may be transferred to third-party investors through one or more CRT transactions.The risk transfer could occur prior to,or simultaneously with,our purchase of the loan(i.e.,front-end coverage)or after the purchase of the loan(i.e.,back-end coverage).STACR and ACIS OfferingsOur two primary CRT programs are STACR and ACIS.nSTACR-Our primary Single-Family securities-based credit risk sharing transaction.STACR Trust note transactions transfer risk to the private capital markets through the issuance of unguaranteed notes using a third-party trust.In a STACR transaction,we create a reference pool of loans from our Single-Family mortgage portfolio,and a third-party trust issues credit notes linked to the reference pool.The trust makes periodic payments of principal and interest on the notes to noteholders,but is not required to repay principal to the extent that the note balance is reduced as a result of specified credit events on the mortgage loans in the related reference pool.We make payments to the trust to support payment of the interest due on the notes.The amount of risk transferred in each transaction affects the amounts we are required to pay.We receive payments from the trust that otherwise would have been made to the noteholders to the extent there are certain defined credit events on the mortgage loans in the related reference pool.The note balance is reduced by the amount of the payments to us,thereby transferring the related credit risk of the loans in the reference pool to the note Managements Discussion and Analysis Our Business Segments|Single-FamilyFREDDIE MAC|2023 Form 10-K30investors.Generally,the note balance is also reduced based on principal payments that occur on the loans in the reference pool.The diagram below illustrates a typical STACR transaction.nACIS-Our primary insurance-based credit risk sharing transaction.ACIS transactions are insurance policies we enter into with global insurance and reinsurance companies to cover a portion of credit risk on the mortgage loans in the related reference pools.We pay monthly premiums to the insurers or reinsurers in exchange for claim coverage on specified credit events on the mortgage loans in the related reference pool.We require our ACIS counterparties to partially collateralize their exposure to reduce the risk that we will not be reimbursed for our claims under the policies.We primarily use STACR and ACIS transactions to transfer credit risk on certain recently acquired fixed rate mortgage loans with maturity terms greater than 20 years and original LTV ratios between 60%and 97%.In a typical STACR or ACIS transaction,we transfer to third-party investors a portion of the credit risk between a specified attachment point and a detachment point which may vary based on numerous factors,such as the type of collateral and market conditions.We generally retain the initial loss position and at least 5%of the credit risk of all the positions sold to align our interests with those of the investors.The diagram below illustrates a typical STACR and ACIS structure.We monitor the costs and benefits provided by the CRT coverage we have obtained on a regular basis,including the impact of CRT on our capital requirements under the ERCF.We may periodically terminate certain CRT transactions,through the exercise of contractual call options,repurchases of outstanding securities,or other means,if we determine prior to contractual maturity that they are no longer economically sensible.Additional OfferingsWe also transfer credit risk through issuance of senior subordinate securitizations,additional types of insurance and reinsurance transactions,and risk-sharing arrangements with certain single-family lenders.For additional information on Single-Family mortgage loan credit enhancements,see MD&A-Risk Management-Credit Risk-Single-Family Mortgage Credit Risk-Transferring Credit Risk to Third-Party Investors.Managements Discussion and Analysis Our Business Segments|Single-FamilyFREDDIE MAC|2023 Form 10-K31We also periodically sell certain delinquent loans that we have previously repurchased from securitization trusts.See Note 4 for additional information on sales of mortgage loans.Loss Mitigation ActivitiesServicers perform loss mitigation activities as well as foreclosures on loans that they service for us.Our loss mitigation strategy emphasizes early intervention by servicers in delinquent loans and offers alternatives to foreclosure by providing servicers with default management programs designed to manage delinquent loans and to assist borrowers in maintaining homeownership or facilitate foreclosure alternatives.We offer(or previously offered)a variety of borrower assistance programs,including refinance programs for certain eligible loans and loan workout activities for struggling borrowers.Our loan workouts include both home retention options and foreclosure alternatives.Relief Refinance Program Our relief refinance program allowed eligible homeowners whose loans we already owned or guaranteed to refinance with more favorable terms(such as reduction in payment,reduction in interest rate,or movement to a more stable loan product)and without the need to obtain additional mortgage insurance.The relief refinance program also provided liquidity for borrowers who were current on their mortgages but were unable to refinance because their LTV ratios exceeded our standard refinance limits.Our current relief refinance offering,the Enhanced Relief RefinanceSM program,has been suspended until further notice.Loan Workout ActivitiesHome Retention Options When refinancing is not practicable,we require our servicers to attempt to establish contact with the borrowers to discuss the most appropriate options for delinquency resolution.When the contact is established,we require our servicers first to evaluate the loan for a forbearance plan,repayment plan,payment deferral plan,or loan modification,because our level of recovery on a loan that reperforms is often higher than for a loan that proceeds to a foreclosure alternative or foreclosure.Although workout options are often less costly than a foreclosure,we incur costs as a result of our loss mitigation activities.Specifically,payment deferral plans result in non-interest-bearing balances we have to finance for the life of the mortgage,resulting in economic costs a
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Integrated Annual Report 2023 Contents Search Back 2 E.ON Integrated Annual Report 2023We are the playmaker of change in the energy industry.Leading the way in innovative,sustainable,digital-first solutions that transform the way Europe is powered for all.Contents Search Back 3 E.ON Integrated Annual Report 2023 Energy Networks Our distribution networks are the backbone of the new energy world.We are gradually developing them into intelligent platforms that control complex energy and data flows and provide customers with new options for dealing with energy.Without distribution networks there can be no energy transition and no climate protection.The expansion,modernization,and operation of distribution networks support security of supply and ensure the most efficient use of green electricity.This makes our networks the foundation of livable cities,communities,and regions.Customer Solutions Our solutions help customers meet their personal energy needs and decarbonization goals.This includes energy sales,which offers a wide range of green electricity and green gas tariffs,as well as our solutions business,which provides innovative,sustainable,and digital products and services.Solar power systems,eMobility,energy storage,sensible energy control,and solutions for sector integration enable our customers to reduce their costs and emissions and also to increase their comfort and quality of life.This applies equally to residential customers and small businesses as well as large companies and municipalities.Europes energy system is becoming ever lower in CO2,more decentralized,and more digital.In short:more sustainable.Our two core businessesenergy networks and customer solutionsare playing a big role in making this happen.E.ON is one of Europes largest operators of energy networks and energy infrastructure and providers of innovative customer solutions.The contribution of our roughly 75,000 employees is therefore crucial to successfully propelling the energy transition in Europe.About E.ON Contents Search Back 4 E.ON Integrated Annual Report 2023 Business Highlights 5 To Our Investors 14 Combined Group Management Report 26 Corporate Profile 29 Climate Protection and Environmental Management 40 Employees and Society 55 Governance 74 Sustainable Finance and Investment 85 Business Report 94 Forecast Report 118 Risks and Chances Report 120 Disclosures Pursuant to Section 289,Paragraph 4,and Section 315,Paragraph 4 of the German Commercial Code on the Internal Control System for the Accounting Process 128 Disclosures Pursuant to Section 289a and Section 315a of the German Commercial Code and Explanatory Report 131 Consolidated Financial Statements 133 Consolidated Statement of Income 134 Consolidated Statement of Recognized Income and Expenses 135 Consolidated Balance Sheets 136 Consolidated Statement of Cash Flows 138 Consolidated Statement of Changes in Equity 140 Notes 142 Other Information 249 Declaration of the Board of Management 250 Independent auditors report 251 Independent Assurance Practitioners Report 257 Boards 260 Summary of Financial Highlights 264 Task Force on Climate-related Financial Disclosures(“TCFD”)266 ESG Figures 267 EU Taxonomy 272 Global Reporting Initiative(“GRI”)Index 285 Non-Financial Statement(“NFS”)Index 291 Sustainable Development Goals(“SDG”)-Index 292 Sustainable Accounting Standards Board(“SASB”)Index 293 Financial Calendar and Imprint 299 Contents Search Back 5 E.ON Integrated Annual Report 2023 Investment tempo accelerated and a total of 6.4 billion invested in 2023 E.ON successfully continued growth path in 2023 and surpassed forecast in part owing to temporary effects,posting adjusted EBITDA of 9.4 billion and adjusted net income of 3.1 billion for the 2023 financial year Outlook for the 2024 financial year:adjusted EBITDA of 8.8 and 9.0 billion and adjusted net income of 2.8 and 3.0 billion anticipated Dividend of 0.53 per share proposed for the 2023 financial year,a year-on-year increase of 4 percent Debt factor of 4.0 at year-end 2023 significantly below the maximum figure of 5.0 Business Highlights Contents Search Back 6 E.ON Integrated Annual Report 2023 How We Create Value The following overview uses examples and relevant data to show how we create value for our stakeholders.The three key elements of E.ONs strategysustainability,digitalization,and growthare the centerpiece of our business model and deeply embedded in the way we think,work,and impact peoples lives.This overview is guided by the International Integrated Reporting Councils(“IIRC”)framework.Contents Search Back 7 E.ON Integrated Annual Report 2023 How We Make an Impact Contents Search Back 8 E.ON Integrated Annual Report 2023Key Performance Indicators Financial Contents Search Back 9 E.ON Integrated Annual Report 2023 Key Figures of the E.ON Group Financial 1Adjusted for non-operating effects.2The figure for asset-retirement obligations at December 31,2023,does not fully correspond to the figure shown in the Consolidated Balance Sheets.This is because economic net debt is calculated in part based on the actual amount of E.ONs obligations.The figure at December 31,2022,corresponded to the figure shown in the Consolidated Balance Sheets.3Change in percentage points.4Attributable to shareholders of E.ON SE.5Based on shares outstanding(weighted average).6For the respective financial year;the 2023 figure represents managements dividend proposal.Financial Figures in millions 2023 2022 /-%Sales 93,686 115,660 -19 Adjusted EBITDA1 9,370 8,059 16 Regulated business(%)70 66 6 Quasi-regulated and long-term contracted business(%)3 4 -25 Merchant business(%)27 30 -10 Adjusted EBIT1 6,387 5,197 23 Net income/loss 760 2,242 -66 Net income/loss attributable to shareholders of E.ON SE 517 1,831 -72 Adjusted net income1 3,068 2,728 12 Investments 6,421 4,753 35 Cash provided by operating activities 5,654 10,045 -44 Cash provided by operating activities before interest and taxes 7,225 11,511 -37 Economic net debt(at year-end)2 37,691 32,742 15 Debt factor2 4.0 4.1 -2 Credit rating S&P BBB BBB 0 Credit rating Moodys Baa2 Baa2 0 Credit rating Fitch BBB BBB 0 Average capital employed 59,895 58,760 2 Equity 19,970 21,867 -9 Total assets 113,506 134,009 -15 Cash Conversion Rate(%)80 151 -47 3 ROCE(%)10.7 8.8 22 3 Earnings per share4,5()0.20 0.70 -71 Adjusted net income per share4,5()1.18 1.05 12 Dividend per share6()0.53 0.51 4 Dividend payout 1,384 1,331 4 Contents Search Back 10 E.ON Integrated Annual Report 2023 Key Performance Indicators Sustainability Contents Search Back 11 E.ON Integrated Annual Report 2023 Key Figures of the E.ON Group Sustainability 1Proportion of taxonomy-aligned capex,opex,and sales relative to taxonomy-eligible activities.2This KPI quantifies the avoided emissions that contribute to a low-carbon economy in connection with our customers,assets,and solutions.3The proportion of renewables capacity calculated as a percentage of the total sum of all installed generating capacity.4Number of employees does not include apprentices,working students,or interns.5Serious incidents and fatalities(SIF)among employees:safety incidents per million hours of work.6Lost time injury frequency(LTIF)measures work-related accidents resulting in lost time per million hours of work.7Average number of formal training hours per employee per year.8System average interruption duration index(SAIDI)for power.9Refers to shareholder representatives.Sustainability Figures 2023 2022 Environment CO2 emissions:Scope 1(millions of metric tons)2.01 2.88 Scope 2(millions of metric tons)(location-based)3.46 3.38 Scope 3(millions of metric tons)(market-based)65.23 82.58 EU taxonomy aligned capex(%)1 98 98 EU taxonomy aligned opex(%)1 98 97 EU taxonomy aligned sales(%)1 97 97 Avoided CO2 emissions together with our customers(millions of metric tons)2 106 108 Share of renewable generation plants connected to E.ONs power grid(%)3 86 85 Ecological network corridor management(%)12 8 Number of smart energy meter installations(thousands)13,803 12,178 Number of smart heat meter installations(thousands)94 n.a.Number of charging points sold by E.ON 23,923 20,417 Green power as a proportion of total power sales(%)54 44 Social Employees of the E.ON Group(at year-end)4 74,618 71,613 Proportion of women(%)32 31 Average age of employees 42 42 Serious incidents and fatalities(SIF)among employees5 0.03 0.04 Lost time injury frequency(LTIF)among employees6 2.2 2.1 Proportion of women executives(%)24 23 People development(hours per employee)7 22.0 18.2 System average interruption duration index(SAIDI)(minutes)8 Germany 21 24 Sweden 156 121 Czech Republic 253 451 Community contribution(in millions)22 18 Volunteer activities of E.ON employees(number of volunteer hours)22,129 13,340 Governance Proportion of women on the Supervisory Board(%)9 38 30 Proportion of independent Supervisory Board members(%)100 100 ESG targets included in Management Board compensation Contents Search Back 12 E.ON Integrated Annual Report 2023Key Performance Indicators Energy Networks Contents Search Back 13 E.ON Integrated Annual Report 2023 Key Performance Indicators Customer Solutions Contents Search Back 14 E.ON Integrated Annual Report 2023 Good Reasons to Invest in E.ON StockEnergy Networks Long-term green growth in a regulated environment Multi-decade growth opportunities from the green energy transition and a regulated business nature provide for a visible and profitable earnings path Energy Infrastructure Solutions Growth acceleration from contracted infrastructure Best-in-class infrastructure portfolio capitalizing upon decarbonization needs for cities and industries Energy Retail Attractive returns and reliable cash generation Healthy cash flows from a diversified and capital light business.Leveraging customer base to grow a solutions portfolio addressing the rising demand for electrification Strategic Foundation Digitalization and sustainability as strategic backbones Pioneering the digital transformation of the energy sector and applying strict sustainability criteria as the core foundation for steering the Company Financial strategy Focus on value-creation and shareholder returns Clear value-creation focus and solid financial headroom ensuring an attractive shareholder return outlook including dividends and earnings growth To Our Investors To Our Investors Contents Search Back E.ON on the Capital Market CEO Letter Report of the Supervisory Board 15 E.ON Integrated Annual Report 2023 To Our Investors E.ON on the Capital Market Wars and Crises Affect Capital Markets E.ON stocks value performance at the end of 2023 had improved by 30 percent relative to its year-end closing price for 2022,thereby outperforming the DAX index of blue-chip German stocks(20 percent)and also its European peer index,the Euro Stoxx 600 Utilities(12 percent).On December 29,2023,E.ON stock closed the year at a price of 12.15 compared with 9.33 at year-end 2022.High inflation,prime interest rate hikes along with concerns about more interest rate increases,economic uncertainty,the ongoing war in Ukraine,and the escalation of the Middle East conflict had a significant impact on the performance of European and German stocks in 2023.Continuous Dividend Growth At the 2024 Annual Shareholders Meeting on May 16,2024,the Management Board and Supervisory Board will propose paying out a cash dividend of 0.53 per share for the 2023 financial year(prior year:0.51).Based on E.ON stocks year-end 2023 closing price,the dividend yield is 4 percent.The payout ratio(as a percentage of adjusted net income)is 45 percent.Our dividend policy aims to offer our shareholders attractive dividend growth of up to 5 percent annually.E.ON Stock Key Figures Per share()2023 2022 Dividend1 0.53 0.51 Dividend payout1(in millions)1,384 1,331 Twelve-month high2 12.63 12.38 Twelve-month low2 9.47 7.41 Year-end closing price2 12.15 9.33 Market capitalization3(in billions)33.77 24.65 1For the respective financial year;the 2023 figure represents managements dividend proposal.2Source:NASDAQ.3Based on ordinary shares outstanding at year-end.To Our Investors Contents Search Back E.ON on the Capital Market CEO Letter Report of the Supervisory Board 16 E.ON Integrated Annual Report 2023 Broad International Investor Base The most recent survey at year-end 2023 shows that E.ON stock has roughly 60 percent institutional investors,roughly 21 percent retail investors,and about 19 percent other investors.Investors in Germany hold about 42 percent of E.ON stock,those outside Germany about 58 percent.E.ON Stock Is Represented on Numerous Stock Exchanges and in a Variety of Indices E.ON stock trades in Frankfurt am Main and on other German stock exchanges as well as via electronic trading platforms such as Xetra.It is also available on stock exchanges in other European countries.E.ON stock is included in the DAX and other indices in Europe,such as the Euro Stoxx 600 Utilities,MSCI World,and the S&P Europe 350.E.ON stock trades over the counter on OTC Pink in the United States in the form of American depositary receipts(“ADRs”).E.ONs ADR program offers U.S.investors the opportunity to acquire E.ON stock and hold it in the form of share certificates that are traded and settled like other U.S.stocks.Analyst Estimates E.ON stock is rated by a large number of financial analysts from various investment banks and brokerage houses.The current recommendations can be viewed at Stock Symbols and Identification Numbers Reuters:Xetra EONGn.DE Reuters:Frankfurt Stock Exchange EONGn.F Bloomberg:Frankfurt Stock Exchange EOAN GY Bloomberg:ADR over-the-counter code EOANGY US Security Identification Numbers Germany ENAG99 International Securities Identification Number(ISIN)DE000ENAG999 To Our Investors Contents Search Back E.ON on the Capital Market CEO Letter Report of the Supervisory Board 17 E.ON Integrated Annual Report 2023 Ongoing Investor Communications Our investor relations continue to be founded on four principles:openness,continuity,credibility,and equal treatment of all our investors.Our mission is to provide prompt,precise,and relevant information at our periodic conferences and road shows worldwidebecause maintaining regular communications and relationships is essential for good investor relations.The subsiding of the Covid-19 pandemic enabled us to carry out a significant part of our investor relations activities in 2022 in person.A hybrid approach of virtual and in-person activities has proven to be effective.This helps us communicate with capital markets efficiently and purposefully and meet our investors needs.Foresightful Funding,Stable Credit Rating Debt capital represents a very important financing source for the E.ON Group.That is why we focus on satisfying the demands of creditors as well as those of shareholders.During the year under review,the credit ratings of Standard&Poors,Moodys,and Fitch remained stable,reflecting the confidence in E.ONs creditworthiness and thus supporting its competitiveness for future financing activities.E.ON issued euro-denominated bonds totaling 3.3 billion in the 2023 financial year and,at year-end 2023,had a solid funding situation that serves in part as prefinancing for the 2024 financial year.In addition,E.ON continually aims to maximize the diversity of its investor base to ensure that it has cost-optimized access to a variety of funding sources at all times.This periodically exploring opportunities for issuing bonds in other currencies.E.ON has a 10 billion Commercial Paper(“CP“)program and a US$10 billion CP program,under which it can issue short-term notes.Financial Framework for Sustainable Funding Sustainability aspects play an increasingly important role in many international investors decision for or against a particular investment.In 2021 E.ON became the first company to fully align its Green Bond Framework,under which it issues debt instruments whose issuance proceeds fund sustainable investment projects,not only with the ICMA Green Bond Principles but also with the EU Taxonomy.The EU Taxonomy Regulation defines which economic activities are classified as environmentally sustainable,thereby setting a Europe-wide standard for sustainable investment.E.ON generally intends to cover more than 50 percent of its annual financing requirements with green bonds.Green bonds accounted for about 75 percent of total bond financing of just under 2.5 billion in 2023.We provide detailed information on the topic of financing in the Financial Situation chapter.Contents Search Back 18 E.ON Integrated Annual Report 2023The E.ON Management Board The Management Board manages the Companys business,with all its members bearing joint responsibility.It determines E.ONs corporate objectives,fundamental strategic course,corporate policy,and organizational setup.From left to right:Marc Spieker Chief Financial Officer Victoria Ossadnik Chief Operating Officer Digital Thomas Knig Chief Operating Officer Networks Patrick Lammers Chief Operating Officer Commercial Leonhard Birnbaum Chief Executive Officer To Our Investors Contents Search Back E.ON on the Capital Market CEO Letter Report of the Supervisory Board 19 E.ON Integrated Annual Report 2023 CEO LetterDear Shareholders and Friends of E.ON,When I became CEO three years ago,I predicated a decade of growth.A lot has happened since then:the Covid pandemic,natural and climate disasters at many E.ON locations around Europe,the war in Ukraine and the attendant energy crisis,the uptick in interest rates,and Europes economic downturn.All of this has presented us with enormous challenges.But none of it has altered our solid growth prospects.On the contrary,in 2023 we again defied difficult circumstances.We again delivered strong earnings9.4 billion in Group adjusted EBITDAthat exceeded our expectations for the 2023 financial year.And we again recorded growth in our financial results and investments.Our growth strategy,which is propelled by the trend toward sustainability and the need for full digitalization,remains valid.Our billions of euros of investments in the energy transition enable us to provide what Europe needs now more than ever:new energy infrastructure for sustainable,secure,and affordable energy.Renewables expansion is happening worldwide and in all types of locations.In France despite nuclear power.In Poland despite hard coal.In Asia despite the simultaneous expansion of conventional generation.In southern states of the USA despite the fact that climate action is almost a dirty word there.Part one of the transition is therefore well advanced and continues to progress inexorably.But part two is still almost at the beginning.The transition is no longer just about big wind and solar farms.Its about solutions for decarbonizing households and industry that,after the experiences of the energy crisis,are increasingly considered to be safeguards for a stable and affordable energy supply.Its about electrifying transportation and heating and air conditioning systems for buildings.And all of this requires network connections and a global expansion and upgrade of existing networks.The IEAs most recent World Energy Outlook predicts that global network infrastructure will need to be doubled.We strategically aligned E.ON to precisely these needs.And we increasingly benefit from them.In the 2023 financial year,our two core segmentsEnergy Networks and Customer Solutionsgrew in almost all of our European markets relative to the prior year.Were investing even more and even faster in the energy transition.Well again massively expand our planned investments for 20242028 to a total of 42 billion compared with the 21 billion wed planned for the five years starting in 2021.Leonhard Birnbaum Management Board Chairman and CEO To Our Investors Contents Search Back E.ON on the Capital Market CEO Letter Report of the Supervisory Board 20 E.ON Integrated Annual Report 2023All of this fills us with optimism and with completely new self-confidence regarding our future business development.After all,the network business in particular has metamorphized in recent years.It has become a growth business thats increasingly attracting the attention of policymakers,the general public,and investors.For good reason:our networks are critical for the energy transition.The final weeks of the 2023 calendar year almost marked something of a turning point in this regard.First,the European Commission adopted a Grid Action Plan,thereby putting grid expansion at the top of its energy transition agendasomething that would have been unthinkable just a few years ago.Second,just before Christmas,European policymakers also agreed on a constructive reform of Europes electricity market design.All calls for more government intervention were met with a clear and correct message:the key to a sustainable,reliable,and affordable energy future is private investment.And in particular this means investments in network infrastructure and decarbonization solutions like those made by E.ON,one of Europes leading companies in this area.I consider this to be a great opportunity for our Group.And we want to seize it by making our leading role in the energy transition even more visible.In the interests of our customers,in the interests of our shareholders,and in the interests of society at large.This means that well continue to invest to satisfy the rising demand for energy infrastructure.But it also means that well lead the way where others hesitatelike in the promising area of network flexibility.And it also means that in the future our corporate image will change.Weve purposely not rebranded E.ON during the Groups recent years of fundamental changes and restructuring.But if not now,when?We think its time for our brand image to reflect our central role and our new self-confidence.And thats why we on the Management Board have made the unanimous decision to align the E.ON brand with our future growth and our leadership ambitions in the energy world.These days,the public is getting to know E.ON in a new guise and with clear ambitions that go far beyond marketing.Were showing who we want to be:the playmaker of Europes energy transition.And well do what a playmaker does:shape the game.Best wishes,Leo BirnbaumTo Our Investors Contents Search Back E.ON on the Capital Market CEO Letter Report of the Supervisory Board Report of the Supervisory Board Dear Shareholders,2023 was a special year for E.ON.The transformation of Europes energy system in the wake of Russias war of aggression against Ukraine continued to gain pace.E.ON played a key role in it.In a continued volatile market environment,it was necessary to reaffirm the implementation of E.ONs growth strategy and the accompanying significant investments in network expansion and decarbonization solutions.The energy industry will be where growth happens in the year ahead.This entails an obligation as well:realizing this growth potential is what will make E.ON successful.The Supervisory Board would like to thank the Management Board and all employees for the special efforts they made last year.In the 2023 financial year the Supervisory Board carefully performed all its duties and obligations under law,the Companys Articles of Association,and its own rules and procedures.It advised the Management Board in detail about the Companys management and continually monitored the Management Boards activities,assuring itself that the Companys management was legal,purposeful,and orderly.At five regular meetings it addressed all issues relevant to the Company.In addition,it carried out one written resolution procedure.On a regular basis,the shareholder representatives and employee representatives made separate preparations for these meetings with the participation of one or several members of the Management Board.Three members were each unable to attend one Supervisory Board meeting;otherwise,all members attended all meetings.The Management Board regularly provided the Supervisory Board with timely and comprehensive information about significant business transactions in both written and oral form.At the meetings of the full Supervisory Board and its committees,the Supervisory Board had sufficient opportunity to actively discuss the Management Boards reports,motions,and proposed resolutions.After thoroughly examining and discussing the resolutions proposed by the Management Board,the Supervisory Board voted on them when it was required by law,the Companys Articles of Association,or the Supervisory Boards rules and procedures.Furthermore,the Supervisory Board also met on a recurring basis without the Management Board being present.Erich Clementi Chairman of the Supervisory Board E.ON Integrated Annual Report 202321 To Our Investors Contents Search Back E.ON on the Capital Market CEO Letter Report of the Supervisory Board In addition,there was a regular exchange of information between the Chairman of the Supervisory Board and the members of the Management Board,in particular the Chairman,during the entire financial year.In the case of particularly pertinent issues,the Chairman of the Supervisory Board was kept informed at all times.He likewise maintained contact with the members of the Supervisory Board outside of board meetings.All meetings of the Supervisory Board and its committees took place in person.Members of the Supervisory Board unable to attend in person were given the opportunity to attend by means of video conference.This was made use of in some instances.Implementation of E.ONs Growth Strategy In the 2023 financial year,the Supervisory Board fulfilled discussed E.ONs strategic direction with the Management Board,in particular in view of the altered geopolitical and regulatory situations.The Management Board the members of the Supervisory Board were in agreement regarding the measures presented by the Management Board.In addition,the Management Board informed the Supervisory Board on an ongoing basis about growth projects and the development of innovative growth businesses.Key Topics of the Supervisory Boards Discussions Policy developments in Germany and Europe formed a key topic of the Supervisory Boards deliberations.The principle developments in to Germany were implementation of the Building Energy Act and the Heat Planning Act as well as changes to the regulatory environment.The reform of the EUs electricity market design was also a regular topic of discussion.Furthermore,the Supervisory Board dealt in detail with the price performance of E.ON stock,in particular regarding additional potential for value enhancement and growth opportunities,as well as E.ONs positioning on the capital market.In the context of the Groups operating business,the Supervisory Board addressed at length how the calmer situation on wholesale commodity markets affects E.ON as well as the business situation of the Group and its companies.It discussed E.ON SEs and the E.ON Groups asset,financial,and earnings situation,dividend policy,workforce developments,and earnings opportunities and risks.The Supervisory Board and the Management Board Overview of the Attendance of Supervisory Board Members at Meetings of the Supervisory Board and Its Committees in the 2023 financial year Supervisory Board membersSupervisory BoardExecutive CommitteeAudit and Risk CommitteeInnovation and Sustainability Committee Nomination Committee Clementi,Erich 5/5 4/4-1/11 2/2 Kley,Karl-Ludwig(until May 17,2023)2/22/22-2/2Frhlich,Klaus 4/51-4/4-Grillo,Ulrich 5/5 4/4 2/22-Groth,Anke 5/51-4/41,4-Petit,Nadge(since May 17,2023)3/3-2/23-Schmitz,Andreas 5/5-4/4 3/31 1/11 Schmitz,Rolf Martin 5/5 2/23-1/11-Segundo,Karen de(until May 17,2023)1/2-1/222/2Wilkens,Deborah 5/5-4/4 3/31-Woste,Ewald(until May 17,2023)2/2-1/22-Schmitz,Christoph 4/5 4/4-Bauer,Katja 5/5-1/23 2/21-Luha,Eugen-Gheorghe 5/5-2/22-May,Stefan 5/51-3/4-Pelouch,Miroslav(until May 17,2023)2/2-2/22-Pinczsn Mrton,Szilvia5/5-Phls,Ren 5/5 2/23 4/4-Schulz,Fred(until May 17,2023)2/2 2/22 2/22-Wallbaum,Elisabeth 5/51-4/4-Winterweber,Axel 5/5 4/41-2/23-1Participation(s)as a guest.2Committee member until May 17,2023.3Committee member since May 17,2023.4Committee member since June 5,2023.E.ON Integrated Annual Report 202322 To Our Investors Contents Search Back E.ON on the Capital Market CEO Letter Report of the Supervisory Board thoroughly discussed the E.ON Groups medium-term plan for 2024 to 2026.The Supervisory Board was provided with information on a regular basis about the Companys cybersecurity,health,(occupational)safety,and environmental performance(in particular,key accident indicators)as well as current customer numbers,customer satisfaction,and the number of apprentices.Finally,the Supervisory Board resolved to extend Dr.Victoria Ossadniks appointment as a Management Board member.Furthermore,it decided in mutual agreement with Patrick Lammers not to extend his appointment.Corporate Governance In the declaration of compliance issued at the end of the year,the Supervisory Board and the Management Board declared that E.ON was in full compliance with the recommendations of the“Government Commission German Corporate Governance Code”dated April 28,2022,published by the Federal Ministry of Justice in the official section of the Federal Gazette(Bundesanzeiger)on June 27,2022,since the last declaration in December 2022.The Supervisory Board and the Management Board also declared that E.ON has been in full compliance with the recommendations of the“Government Commission German Corporate Governance Code”dated April 28,2022,published by the Federal Ministry of Justice and Consumer Protection in the official section of the Federal Gazette(Bundesanzeiger)on June 27,2022.The current version of the declaration of compliance as well as earlier versions are published on the Internet at .In early 2023 the Supervisory Board Chairman held discussions with investors on topics specific to the Supervisory Board at a corporate governance road show.In accordance with E.ON SEs Articles of Association,the Management Board is authorized to provide that Annual Shareholders Meetings held on or before June 30,2025,may be held without the physical presence of shareholders or their proxies at the venue of the Annual Shareholders Meeting.The decision on the format of the Annual Shareholders Meeting will be made annually.Deliberations focus in particular on safeguarding shareholder rights.Aspects such as the agenda,energy and resource consumption,and process security are taken into account as well.On this basis,the 2024 Annual Shareholders Meeting will again take place in a virtual format.In the 2023 financial year,one member of the Innovation and Sustainability Committee had a potential conflict of interest(in relation to an agenda item regarding E.ONs operating business)due to another directorship.For precautionary reasons,the member did not participate in the committees resolution.Otherwise,the Supervisory Board is aware of no indications of conflicts of interest involving members of the Management Board or Supervisory Board in the 2023 financial year.Education and training sessions on selected issues of E.ONs business were conducted for Supervisory Board members in the 2022 financial year.The key policy and regulatory developments in the regions in which E.ON operates and their implications for E.ONs energy networks business were explained to the Supervisory Board at an information event.In addition,the Supervisory Board was given a practical presentation of the challenges posed by increasingly digitalized network control technology resulting from extensive network expansion.E.ONs British customer solutions business was presented in detail and the decarbonization of the energy and heat supply was explained at a meeting held in the United Kingdom.The targets for the Supervisory Boards composition,including a competency profile and a diversity concept,with regard to Recommendation C.1 of the German Corporate Governance Code and Section 289f,Paragraph 2,Item 6 of the German Commercial Code and the status of the implementation of the competency profile in the form of a qualifications matrix are available in the Corporate Governance Declaration.Committee Work To fulfill its duties carefully and efficiently,the Supervisory Board has created committees.The Executive Committee held four regular meetings in the 2023 financial year.All members took part in all of the committees meetings.At its meetings,the committee,in particular,addressed current developments in conjunction with the transformation of Europes energy system and the associated policy and regulatory changes.Additionally,the Executive Committee dealt with the Management Boards compensation,including the achievement of Management Board targets for 2023 and the setting of the targets for 2024.In addition,the Executive Committee did preparatory work for the resolutions relating to personnel matters on the Management Board.Furthermore,the Executive Committee thoroughly discussed the strategy review.E.ON Integrated Annual Report 202323 To Our Investors Contents Search Back E.ON on the Capital Market CEO Letter Report of the Supervisory Board The Innovation and Sustainability Committee met three times.Three members were unable to attend one meeting each.Apart from that,all members attended all of the committees meetings.The matters addressed by the committee included the progress and specific initiatives in the area of innovation as well as E.ONs position in sustainability rankings and the external perception of E.ON with regard to sustainability.The further development of various new customer solutions businesses was the topic of extensive discussions as well.The Audit and Risk Committee met four times in 2023.One member was unable to attend one meeting,Otherwise,all members attended all meetings.The committee conducted a thorough review,in particular of the 2021 Financial Statements of E.ON SE(prepared in accordance with the German Commercial Code),the E.ON Groups 2022 Consolidated Financial Statements(prepared in accordance with International Financial Reporting Standards,or“IFRS”),and the 2023 intermediate financial reports of E.ON SE.The committee discussed the recommendation for selecting an independent auditor for the 2023 financial year as well as the intermediate financial reports and assigned the tasks for the independent auditors auditing services,established the audit priorities,determined the independent auditors compensation and reviewed the independent auditors qualifications as well as the quality of the independent audit,and verified the auditors qualifications and independence in accordance with the requirements of the law and the German Corporate Governance Code.The committee also assured itself that the independent auditor has no conflicts of interest.In addition,the committee addressed other matters assigned to it by law,the Companys Articles of Association,or the Supervisory Boards rules and procedures,in particular Internal Audits activities and reports,accounting issues,risk management,transactions with related parties,and developments in the area of compliance.Furthermore,the committee thoroughly discussed the Combined Group Management Report and the proposal for profit appropriation and prepared the relevant recommendations for the Supervisory Board and reported them to the Supervisory Board.On the basis of the quarterly risk reports,the committee noted that no risks were identified that might jeopardize the existence of the Group or individual segments.Furthermore,the committee addressed in detail the implications and the management of the energy crisis,occupational safety,and the Companys cyber,legal,and data-protection risks.In addition,there was a regular exchange of information between the Chairman of the Audit and Risk Committee and the independent auditor throughout the financial year.The Nomination Committee met twice.At these meetings,it did preparatory work for the Supervisory Boards election proposal to the 2023 Annual Shareholders Meeting for the shareholder representatives on the Supervisory Board of E.ON SE.When proposing candidates to the Supervisory Board,the Nomination Committee took into account the requirements of the German Stock Corporation Act,the German Corporate Governance Code,and the Supervisory Boards rules and procedures as well as the objectives that the Supervisory Board resolved for its composition.The committee thus ensured that Supervisory Board members and the board as a whole have the knowledge,skills,and professional experience required to properly perform their duties.Committee chairpersons reported the agenda and results of their respective committees meetings to the full Supervisory Board on a regular basis.Information about the committees composition and responsibilities is in the Corporate Governance Declaration.Examination and Approval of the Financial Statements,Approval of the Consolidated Financial Statements,Proposal for Profit Appropriation for the Year Ended December 31,2023 KPMG AG,Wirtschaftsprfungsgesellschaft,Dsseldorf(“KPMG”),audited and submitted an unqualified auditors and/or audit opinion on the Consolidated Financial Statements of E.ON SE prepared in accordance with IFRS,the Combined Group Management Report,and the Compensation Report pursuant to Section 162 of the German Stock Corporation Act(“AktG”)for the year ended December 31,2023.KPMG AG Wirtschaftsprfungsgesellschaft was elected as Group auditor by the Annual Shareholders Meeting on May 17,2023,and has been E.ON SEs independent auditor without interruption since the 2021 financial year.The auditor responsible at KPMG AG Wirtschaftsprfungsgesellschaft is Gereon Lurweg,who is performing this function for the third time.The IFRS Consolidated Financial Statements exempt E.ON SE from the requirement to publish Consolidated Financial Statements in accordance with German law.The Supervisory Board reviewed and,at its annual results meeting on March 12,2024,thoroughly discussedin the presence of the independent auditor and with knowledge of,and reference to,the Independent Auditors Report and the results of the preliminary review by the Audit and Risk CommitteeE.ON SEs Financial Statements prepared in accordance with the German Commercial Code,Consolidated Financial Statements,and Combined Group Management Report as well as the Management Boards proposal for profit appropriation.The independent auditor was available for supplementary questions and answers.After concluding its own examination,the Supervisory Board determined that there are no objections to the findings.It therefore acknowledged and approved the Independent Auditors Report.E.ON Integrated Annual Report 202324 To Our Investors Contents Search Back E.ON on the Capital Market CEO Letter Report of the Supervisory Board The Supervisory Board also examined the sustainability reporting consisting of the combined Non-Financial Statement and additional sustainability information which is integrated into the Combined Group Management Report.KPMG also audited the Non-Financial Statement and selected additional sustainability information and issued an unqualified opinion.The disclosures were subjected to a limited assurance engagement by KPMG;selected disclosures were audited with reasonable assurance.Following the final result of its examination,the Supervisory Board raised no objections to the integrated sustainability reporting,including the Non-Financial Statement.On March 12,2024,the Supervisory Board approved the Financial Statements of E.ON SE prepared by the Management Board and the Consolidated Financial Statements.The Financial Statements are thus adopted.The Supervisory Board agrees with the Combined Group Management Report and,in particular,with its statements concerning the Companys future development.The Supervisory Board examined the Management Boards proposal for profit appropriation,which includes a cash dividend of 0.53 per ordinary share,also taking into consideration the Companys liquidity and its finance and investment plans.After examining and weighing all arguments,the Supervisory Board agrees with the Management Boards proposal for profit appropriation.Personnel Changes on the Supervisory Board The previous Supervisory Board members term of service ended at the Annual Shareholders Meeting on May 17,2023.New elections were therefore held.At the same time,a new Supervisory Board size of 16 membersfor a limited period through the 2028 Annual Shareholders Meetingwas resolved.With the exception of Karl-Ludwig Kley,Karen de Segundo and Ewald Woste on the shareholder side and Fred Schulz and Miroslav Pelouch on the employee side,all previous Supervisory Board members were reelected or reappointed.Nadge Petit was newly elected to the Supervisory Board on the shareholder side.On the employee representatives side,effective January 1,2024,Frank Werneke succeeded Christoph Schmitz,who ended his service on the Supervisory Board on December 31,2023.Erich Clementi has been the new Supervisory Board Chairman since May 17,2023,succeeding Karl-Ludwig Kley.Pages 260 and 261 of the Integrated Annual Report provide an overview of all members of the Supervisory Board.Essen,March 12,2024 The Supervisory Board Best wishes,Erich Clementi Chairman E.ON Integrated Annual Report 202325 Contents Search Back 26 E.ON Integrated Annual Report 2023 Corporate Profile 29 Business Model 29 ESG Materiality and Stakeholder Engagement 29 Strategy 32 Innovation 36 Management Control System 38 Climate Protection and Environmental Management 40 Climate Protection 40 Environmental Management 47 Sustainable Products and Services 52 Employees and Society 55 Occupational Health and Safety 55 Working Conditions and Employee Development 59 Customer Satisfaction 64 Security of Supply 66 Community Involvement 69 Data Protection,Cybersecurity,and Product Safety 70 Business Resilience Management 72 Governance 74 Compliance and Anticorruption 74 Energy Affordability 76 Diversity and Inclusion 78 Human Rights and Supply Chain Management 80 Tax 83 Sustainable Finance and Investment 85 EU Taxonomy 85 Sustainable Finance 93 ESG Ratings of E.ON 93 ESG Asset Management and Pension Assets 93 Business Report 94 Macroeconomic and Industry Environment 94 Special Events in the Reporting Period 99 Subsequent Events 100 Business Performance 101 Energy Networks 102 Customer Solutions 103 Earnings Situation 105 Financial Situation 111 Asset Situation 115 E.ON SEs Earnings,Financial,and Asset Situation 116 Forecast Report 118 Risks and Chances Report 120 Disclosures Pursuant to Section 289,Paragraph 4,and Section 315,Paragraph 4 of the German Commercial Code on the Internal Control System for the Accounting Process 128 Disclosures Pursuant to Section 289a and Section 315a of the German Commercial Code and Explanatory Report 131 Combined Group Management Report Combined Group Management Report Contents Search Back About this Report Corporate Profile Climate Protection and Environmental Management Employees and Society Governance Sustainable Finance Business Report Forecast Report Risks and Chances Report Internal Control System Disclosures Regarding Takeovers 27 E.ON Integrated Annual Report 2023 About This Report GRI 2-2,GRI 2-3,GRI 2-4,GRI 2-5,GRI 2-6 For the 2023 reporting year,E.ON has again published an Integrated Annual Report that combines financial and non-financial reporting.The reason is that sustainability is the centerpiece of E.ONs strategy andin every dimensionthe standard for our actions.An integrated report provides our stakeholders with a holistic and transparent view of our financial,environmental,and social performance.Standards This Integrated Annual Report applies to the E.ON Group as well as E.ON SE.E.ON is therefore fulfilling all requirements of International Financial Reporting Standards(“IFRS”),the German Commercial Code(German abbreviation:“HGB”),and German Accounting Standards(German abbreviation“DRS”).The combined Non-Financial Statement(“NFS”)pursuant to Sections 315b and 315c in conjunction with Sections 289b to 289e of the HGB is fully integrated into the Combined Group Management Report.The Group Management Report thus contains information on five aspects:the environment,employees,social matters,human rights,as well as anti-corruption and anti-bribery.The NFS also complies with the disclosure requirements of the EU Taxonomy Regulation.The Non-Financial Statement(“NFS”)Index indicates where these disclosures can be found in the Integrated Annual Report.In addition,the Disclosures Regarding Takeovers chapter is integrated into the Annual Report.E.ONs sustainability reporting,which consists of the NFS and other sustainability disclosures,is guided by the findings of its materiality analysis and topics relevant for stakeholders.It has been prepared with reference to the GRI Standards 2021 by the Global Reporting Initiative.The GRI standards covered by the content of a chapter are displayed on the first page of the chapter.The GRI Index provides an overview.The Other Information chapter contains E.ONs disclosures regarding the Electric Utilities and Power Generators Standards issued by the Sustainability Accounting Standards Board(“SASB”).E.ON is committed to the ten principles of the United Nations Global Compact(“UNGC”)and supports the United Nations Sustainable Development Goals(“SDGs”).We describe our contributions to the SDGs in the Strategy chapter.Our climate-related reporting,which is based on the recommendations of the Task Force on Climate-related Financial Disclosures(“TCFD”)as well,can be found in the chapter Climate Protection.Scope This report encompasses all subsidiaries that are fully consolidated in E.ONs Consolidated Financial Statements 2023.Any deviations are marked accordingly.KPI-based thresholds are used to distinguish companies that do not contribute significantly to the report.The next chapter,Business Model,contains more information about the E.ON Groups structure and business segments.The reporting period is the 2023 calendar year.For most KPIs the corresponding prior-year figure is provided to improve comparability.Adjustments to prior-year figures of a KPI are explained in footnotes.Statements on the future development of E.ON and its subsidiaries are estimates based on information available at the time of reporting.Actual results may deviate from these statements.The Corporate Governance Declaration is published on our website in the section Corporate Governance.The Integrated Annual Report was published on March 13,2024,and is available in German and English in pdf format.You can download the pdf version of this report at .The previous Integrated Annual Report was published in March 2023.You can find it and additional reports in the investor relations archive.Language To improve readability,we generally use the shorter name for companies and organizations(such as“E.ON”rather than“E.ON SE”).Sustainability Ratings E.ONs commitment to transparency includes subjecting its sustainability performance to independent,detailed assessments by specialized agencies and capital-market analysts.The findings of these assessments provide important guidance to investors and to E.ON.They help us identify our strengths and weaknesses and further improve our performance.The Sustainable Finance chapter presents the results of sustainability ratings.Combined Group Management Report Contents Search Back About this Report Corporate Profile Climate Protection and Environmental Management Employees and Society Governance Sustainable Finance Business Report Forecast Report Risks and Chances Report Internal Control System Disclosures Regarding Takeovers 28 E.ON Integrated Annual Report 2023 Assurance The Combined Group Management Report is generally audited as part of the statutory audit of the financial statements.Content that is not part of the statutory audit of the Consolidated Financial Statements and is therefore excluded from the auditors report is identified separately,as described below.For the NFS and selected additional sustainability information,a separate assurance engagement(“Sustainability Assurance”)was also performed by KPMG AG in accordance with the International Standard on Assurance Engagements(“ISAE”)3000(Revised)issued by the International Auditing and Assurance Standards Board(“IAASB”).The audit assurance applied to the different contents is clarified in the report by means of various symbols.Symbols next to headings H2 apply until the next heading of the same level of hierarchy.Sections within the same chapter that were audited with a different assurance may be marked separately.This is done in longer sections by means of symbols next to the subheadings H3 which apply until the next heading of the same level of hierarchy.In addition,individual sections or KPIs that are subject to a different audit assurance may be marked separately.The corresponding contents are marked as follows:Not part of the statutory audit,audited with reasonable assurance as part of the Sustainability Assurance in accordance with ISAE 3000.Not part of the statutory audit,audited with limited assurance as part of the Sustainability Assurance in accordance with ISAE 3000;individual text passages are indicated by.Not part of the statutory audit,unaudited;individual text passages are indicated by .Prior-year figures and quantified changes from the prior year included in sections marked as audited are,in principle,audited with the same degree of assurance as for the 2023 reporting year.Figures for 2021 were audited with limited assurance.Any deviations are indicated.The precise scope of the audit is described in the Other Information section in the Independent Auditors Report and in the report on the management review of sustainability information.Combined Group Management Report Contents Search Back About this Report Corporate Profile Climate Protection and Environmental Management Employees and Society Governance Sustainable Finance Business Report Forecast Report Risks and Chances Report Internal Control System Disclosures Regarding Takeovers 29 E.ON Integrated Annual Report 2023 Corporate Profile Business Model E.ON is an investor-owned energy company with approximately 74,600 employees led by Corporate Functions in Essen.The Groups core business is divided into two segments:Energy Networks and Customer Solutions.Corporate functions,equity interests managed directly by E.ON SE,and non-strategic operations are reported under Corporate Functions/Other.Corporate Functions Corporate Functions main task is to lead the E.ON Group.This involves charting E.ONs strategic course and managing and funding its existing business portfolio.Corporate Functions tasks include optimizing E.ONs overall business across countries and markets from a financial,strategic,and risk perspective,conducting stakeholder management,and managing E.ON Energy Markets GmbH(“E.ON Energy Markets”),the Companys central commodity procurement unit.The E.ON Groups non-strategic activities,such as the operation of nuclear power stations until April 15,2023,and their dismantling(managed by the PreussenElektra unit)and the generation business in Turkey are reported here as well.Energy Networks This segment consists of E.ONs power and gas distribution networks and related activities.It is subdivided into three regional markets:Germany,Sweden,and East-Central Europe/Turkey(which consists of the Czech Republic,Hungary,Romania,Poland,Croatia,Slovakia,and the stake in Enerjisa Enerji in Turkey,which is accounted for using the equity method).This segments main tasks include operating its power and gas networks safely and reliably,carrying out all necessary maintenance and repairs,and expanding its power and gas networks,which frequently involves adding customer connections and the connection of renewable energy generation assets.Customer Solutions This segment serves as the platform for working with E.ONs customers to actively shape Europes energy transition.This includes supplying customers in Europe(excluding Turkey)with power,gas,and heat,and providing them with solutions that enhance their energy efficiency,energy autonomy,and eMobility.E.ONs activities are tailored to the individual needs of customers across all categories:residential,small and medium-sized enterprises,large commercial and industrial,sales partners,and public entities.The E.ON Groups main presence in this business is in Germany,the United Kingdom,the Netherlands,Nordics(for example,Sweden,Denmark,and Norway),Italy,the Czech Republic,Hungary,Croatia,Romania,Poland,and Slovakia.In addition,Energy Infrastructure Solutions engages in activities aimed at decarbonizing commercial customers,cities,and communities,such as sustainable city solutions and district heating.Significant Changes to the Business Model Effective January 1,2024 Some of the Energy Network segments regional markets were reclassified effective January 1,2024.East-Central Europe/Turkey is now divided into East-Central Europe(which includes the Czech Republic,Slovakia,and Poland)and Southeastern Europe(which includes Hungary,Croatia,Romania,and our stake in Enerjisa Enerji in Turkey,which is accounted for using the equity method).In addition,the Customer Solutions segment was renamed Energy Retail.Furthermore,the Energy Infrastructure Solutions(EIS)was transferred from Energy Retail and has been an independent segment since January 1,2024.We thus now report on its activities separately.Furthermore,the E.ON Groups central commodity procurement unit,E.ON Energy Markets,is reported at Energy Retail effective January 1,2024.It was part of Corporate Functions/Other until December 31,2023.ESG Materiality and Stakeholder Engagement ESG Materiality GRI 3-1,GRI 3-2 E.ON has conducted an annual materiality analysis since 2006.The purpose is to identify and evaluate the sustainability topics that are most important to the Company and its stakeholders.This report contains information on the topics that the materiality analysis deemed to be particularly significant.It also partially addresses less material sustainability topics.E.ON thus aims to meet the different expectations of stakeholders as well as the requirements of environmental,social,and governance(“ESG”)rankings and ratings.We provide an overview of the material and other topics in the Non-Financial Statement(“NFS”)Index.Identification of Material Topics In 2023 E.ON conducted a materiality analysis in accordance with the requirements of the Non-Financial Reporting Directive(“NFRD”).The requirements of the Corporate Sustainability Reporting Directive(“CSRD”)were taken into account,but not applied.We applied the double materiality principle:we considered the financial perspective as well as the impact perspective.The process had four steps,which are described below:Step One:Topic Identification and Collection E.ON first gathered information and evidence on potentially material topics.We consulted a variety of sources,including regulations,reporting standards as well as statements from customers,competitors,investors,and non-governmental organizations(“NGOs”).We used this to create an overview of possible material topics.These were then compared with our existing material topics and collated.The basis for this was an evaluation that correlates a topics frequency of mention to its importance for the industry.Experts from Sustainability,Group Accounting,and Investor Relations divisions reviewed and finally agreed on a short list of E.ONs potentially material topics.Combined Group Management Report Contents Search Back About this Report Corporate Profile Climate Protection and Environmental Management Employees and Society Governance Sustainable Finance Business Report Forecast Report Risks and Chances Report Internal Control System Disclosures Regarding Takeovers 30 E.ON Integrated Annual Report 2023 Step Two:Impact Perspective E.ON analyzed the impact perspective by surveying NGOs,research institutes,suppliers,customers,and other stakeholders.We gave them a questionnaire containing the topics identified in step one and asked them to rate them.The questionnaires findings were then examined in greater depth in stakeholder interviews.Representatives from the Sustainability,Group Accounting,Investor Relations,and Group Risk functions evaluated the surveys findings in a workshop,which concluded the impact analysis.Step Three:Financial Perspective E.ON evaluated the financial perspective by examining the risks and opportunities associated with the ESG topics contained in its Enterprise Risk Management(“ERM”)system.Another workshop,consisting of the same participants,was then held to assess and validate the financial materiality of the topics identified.Step Four:Materiality Threshold E.ON finalized the list of topics by defining a common materiality threshold for the impact and financial perspectives.Only topics that exceeded it were considered material.To determine them,we held a third workshop consisting of the above-mentioned participants.The findings were then presented to the Sustainability Council,which approved E.ONs materiality analysis for 2023.The council is chaired by the Chief Sustainability Officer.He reports periodically to the E.ON Management Board on progress made.Material Topics E.ONs sustainability reporting for the 2023 reporting year must for the last time reflect NFRD requirements.We therefore did not conduct a comprehensive update of our sustainability analysis pursuant to NFRD requirements.Instead,we conducted a Group-wide materiality analysis oriented toward the European Sustainability Reporting Standards 2(“ESRS 2”)in order to prepare for our first reporting pursuant to the Corporate Sustainability Reporting Directive(“CSRD”)for the 2024 reporting year.We integrated the approval of the update of our sustainability analysis pursuant to NFRD requirements from 2022 and assessed the prior years findings to ensure they are up to date.Our CEO Leonard Birnbaum and our CFO Marc Spieker performed the final validation.The findings of our NFRD materiality analysis for 2023,which are listed below,reaffirm the findings of the analysis from the prior year.The highest relevance from a financial and impact perspective was assigned to the following three topics:Climate-change mitigation Energy affordability Reliable energy supply The material topic of climate-change mitigation also encompasses customer solutions that mitigate climate change.Since both aspectsgeneral climate-change mitigation and customer solutions that mitigate climate changeare extensive,they are presented in separate chapters in the Integrated Annual Report 2023.The ESG chapters of this report provide information on E.ONs approach to managing its material topics and outline the Companys progress in the reporting year.The description of the management approach is based on GRI 3-3,Management of material topics.Stakeholder Engagement GRI 2-28,GRI 2-29 E.ON continually seeks dialogue with its various stakeholders.We want to listen to and understand their points of view and also to talk to them openly about the potential short-and long-term impacts of our business activities.This is an important objective of our daily work at the local,national,and European level.A stakeholder is any person who or any group that has an interest in a company.Stakeholder engagement is thus a core process of E.ONs corporate governance.The dialogue formats we choose vary by stakeholder and topic.They range from information campaigns and discussion forums with associations and NGOs to face-to-face discussions and lobbying.For example,E.ON is actively involved in the global investor initiative CDP(Carbon Disclosure Project),works with the United Nations Environment Programme(“UNEP”),and supports the UN Decade on Ecosystem Restoration.Furthermore,since 2021 E.ON has been part of the LEAF Coalition(Lowering Emissions by Accelerating Forest Finance),which is committed to biodiversity and the protection of tropical forests.More information on CDP and the LEAF Coalition can be found in the“Climate Protection”chapter.E.ON is also a member of SolarPower Europe,a European association of energy suppliers and solar companies.The Solar Stewardship Initiative(“SSI”)was set up as part of this association.Its aim is to create more transparency for solar-power supply chains and to ensure compliance with human rights.E.ON actively participates in policy debates on issues that affect the Company.We use a variety of channels for this,including lobbying,media interviews with our executives,and their appearances as public speakers.In addition,policymakers and regulators frequently invite E.ON to provide its technical and energy expertise as part of their decision-making processes.The Company offers its expertise proactively as well.This type of advocacy is important because the energy sector is significantly influenced by policy and regulatory decisions.Energy policy discussions in Brussels and Berlin focused on a future market design for the electricity market and the necessary expansion of infrastructure.Furthermore,E.ON takes part in discussions on energy,environmental,and climate policy in a variety of other forums.For example,Leonhard Birnbaum is part of the European CEO Alliance,an alliance of EU-wide business leaders who discuss ways to provide additional support to the EU Green Deal.Effective November 21,2022,Leonhard Birnbaum was appointed acting Combined Group Management Report Contents Search Back About this Report Corporate Profile Climate Protection and Environmental Management Employees and Society Governance Sustainable Finance Business Report Forecast Report Risks and Chances Report Internal Control System Disclosures Regarding Takeovers 31 E.ON Integrated Annual Report 2023 president of Eurelectric,the association of the European electricity industry;he was elected president in March 2023 and has officially been in office since June 2023.Eurelectric is an umbrella organization representing more than 3,500 European companies active in electricity generation,distribution,and supply.Direct members of Eurelectric are the national associations,including the German Association of the Energy and Water Industries(German abbreviation:“BDEW”),Swedenergy,and Energy UK.The Climate Advocacy and Associations Report provides an overview of E.ONs lobbying approach as well as the associations and initiatives which the Company is part of and the key positions it holds in conjunction with its efforts to propel the energy transition.All of E.ONs lobbying activities and dialogue formats comply with national and European laws and guidelines on representing corporate interests and responsible lobbying.Below is an overview of E.ONs most important stakeholders,their significance for E.ON,and their expectations of E.ON.Combined Group Management Report Contents Search Back About this Report Corporate Profile Climate Protection and Environmental Management Employees and Society Governance Sustainable Finance Business Report Forecast Report Risks and Chances Report Internal Control System Disclosures Regarding Takeovers 32 E.ON Integrated Annual Report 2023 E.ON is a member of numerous industry networks and trade associations in individual countries and at the European level.They enable companies to share information about climate protection,customer needs,and industry trends,and to represent shared interests to policymakers and regulators.Examples of these memberships include:German Association of Energy and Water Industries(German abbreviation:“BDEW”):through the BDEW E.ON is also represented in two European trade associations,Eurelectric and Eurogas.Federation of Germany Industries(German abbreviation:“BDI”):E.ON is engaged in the BDI through its membership in the Association of the German Interconnected Grid Systems Economy(German abbreviation:“VdV”).E.ON also supports the BDI through the Association for the Promotion of Germany Industry.BDI is a member of BusinessEurope,a European umbrella organization.German Industry Initiative for Energy Efficiency(Deutsche Unternehmensinitiative Energieeffizienz,or“DENEFF”):a multi-industry network of companies and organizations dedicated to enhancing energy efficiency.Bitkom:through this industry initiative for a digital economy the Company is also represented in the Federal Association of German Industry(Bundesverband der Deutschen Industrie)and its European umbrella organization,BusinessEurope.E.ON executives take part in the Economic Council of the CDU e.V.and the Economic Forum of the SPD e.V.European Distribution System Operators for Smart Grids(“EDSO for Smart Grids”):European association promoting smart grids and the digitalization of the energy sector.Energy UK:a trade association for energy in the United Kingdom.Swedenergy:a private association of companies involved in electricity production,sale,and trading in Sweden.Stakeholder Dialogue on Safe Post-Operations and Plant Dismantling E.ON subsidiary PreussenElektra is responsible for the safe post-operation and dismantling of its nuclear power plants(“NPPs”).Ongoing dialogue with stakeholders is essential.PreussenElektra communicates with a broad spectrum of stakeholders through press releases and briefings.The Company also uses events and forums to speak directly with its stakeholders and benefit from their feedback.The aim of all these measures is to provide transparent information and build trust.Dialogue remains important during NPPs dismantling as well.In 2023 PreussenElektra held press events at nearly all its NPPs.Annual power plant talks with key local stakeholders took place in the fall as well.Some plants also have dialogue groups for nearby residents,in which PreussenElektra also participated in 2023.People who live near Brokdorf,Isar,and Grafenrheinfeld NPPs and other stakeholders were given the opportunity to visit the plants on selected dates.Strategy 2023:Markets Calm Down,E.ONs Strategy Remains Right on Course Overall,the situation on energy markets in 2023 improved compared with the severe turbulence of 2022.At E.ON,we perceive this in all our regions.The tensions are still noticeable,however,and our prudent planning reflects this.E.ON mastered last years challenges by consistently implementing our strategy focusing on sustainability,digitalization,and growthbecause this strategy has proven to be robust even in times of crisis.Our strategy to be and remain the green energy transition company in Europe therefore remains right on course.We are the playmaker of Europes energy transition and made significant progress in 2023.The energy crisis in 2022 accelerated the energy transition by putting the need for sustainable energy systems into even sharper focus.The energy transition is therefore not only an urgently necessary response to climate change,but also an opportunity for Europe and Germany to simultaneously remain competitive and resilient and thus pursue a sustainable path out of the energy crisis.The policy decisions of Germanys Easter package of renewables legislation show that the emphasis on energy security and energy autonomyalong with the resilient and digital energy infrastructure it requireshas become even more important.E.ON is one of Europes largest operators of electricity and gas networks,and the growth strategy we launched in 2021 therefore puts us right on track to continue propelling and ensuring supply security and multisector decarbonization.The crisis has also made us realize that we must always think about sustainability,supply security,and energy affordability together and that the maxim of E.ONs actions must be to achieve a balance between these three requirements.Germany is part of Europes energy market.The shutdown of Germanys last nuclear power plants in April 2023 and its plan to phase out coal by 2030 make this fact increasingly important.Ensuring supply security and energy affordability can only be achieved by expanding renewables faster.Renewables expansion,in turn,promotes sustainability,but can only succeed if it is accompanied by significantly more and faster network expansion.We are also at a turning point.The energy transition is now primarily a heating transition,which already directly affects every individual or will do so in the future.For example,2023 was already characterized by a strong desire among customers for more autonomy and sustainability.One of the upshots of this was high demand for heat pumps.The heating transition was thus already readily apparent in 2023.Making the energy transition a Combined Group Management Report Contents Search Back About this Report Corporate Profile Climate Protection and Environmental Management Employees and Society Governance Sustainable Finance Business Report Forecast Report Risks and Chances Report Internal Control System Disclosures Regarding Takeovers 33 E.ON Integrated Annual Report 2023 reality is one of the challenges of the decade ahead,not just for E.ON,but for Europe as a whole.We are underlining the importance of this turning point by making,from 2024 onward,our decentralized infrastructure solutions business,Energy Infrastructure Solutions(“EIS”),a strategic business unit alongside our two existing segments,Energy Networks and Customer Solutions/Energy Retail.Without the requisite expansion and digitalization of networks,the energy transition will fail.It is technically feasible,but the question is at what price.Investments in networks can only be made in a reliable and economically attractive regulatory environment.Less bureaucracy and more innovation are necessary,too.At Energy Networks,2023 was primarily characterized by organic growth and the consistent implementation of our strategy.Ongoing renewables expansion led to a further increase in demand to connect these facilities to networks and to expand network capacity.Investments in the 2023 financial year went mainly toward network expansion and infrastructure modernization and digitalization.A significant proportion of Europes renewables capacity is connected to the E.ON Groups grids;indeed,the one millionth renewables facility was connected to E.ONs network in Germany in October 2023.These networks are not only the backbone of the green energy transitionwhich E.ONs considerable investments continue to propelbut also one of the most critical pieces of social infrastructure.It is clear that the energy transition will not be possible without the underlying network infrastructure.The successful implementation of our growth strategy which emphasizes our promise to provide secure and affordable energy was also reflected at Customer Solutions in 2023.Our dynamic management of prices,customer churn,and our portfolio made a significant contribution to stabilization after the crisis.Our focus was always on supply security,affordability,and a sustainable energy supply.Wherever it was economically feasible,E.ON always passed lower market prices through to households and reduced end-customer prices after the significant increases that resulted from the crisis in 2022.Overall,this too demonstrates that the strategic course we setmeasured by the high demand for intelligent solutions and products for decarbonizing households and industryremains stable and will become increasingly important in the future.E.ONs wide range of products and services enables our customers and partners to displace over 100 million metric tons of CO2 annually.The primary feature of 2023 at our Energy Infrastructure Solutions(“EIS”)business was the obtaining of new contracts that will enable us to offer our customers additional decarbonization solutions in the future.At our partner Imerys in Belgium,for example,we installed a generating unit that runs entirely on industrial synthesis gases that result from Imeryss production processes.The unit can supply not only Imeryss production facility but also 40,000 households in the region with electricity year-round.In Poland we signed a contract to develop a project to generate energy from waste heat.These two projects alone will result in annual carbon savings of 81,000 metric tons per year.These kinds of assets are still lighthouse projects,but we want to make them the standard.Among other things,they make a significant contribution to the competitiveness and decarbonization of Europes economy.We therefore made tangible year-on-year progress,not only in further developing this business and growing E.ON,but also in delivering on E.ONs ambitions to make Europes energy system more sustainable.Demand for our sustainable energy solutions is likewise continuing to rise.Not only did our Future Energy Home business record growth by offering decarbonization solutions for households,primarily in newly tapped markets.Our eMobility business continued to expand by means of a Europe-wide strategic partnership with BMW for home charging as well as our acquisition of startup elvah.Elvahs app is designed to make it easier to find available,reliable,and affordable charging stations and also helps us better utilize our charging network.Alongside our existing partnerships with Berlin and Malm,in 2023 we forged our first strategic energy partnership in England with the city of Coventrythe headquarters of E.ON UK plcto jointly develop and propel decarbonization as well as social projects.The pace of our digitalization,which is a key success driver,is swift as well.We are digitalizing across E.ON.We defined technological standards for the entire E.ON Group in order to harmonize our IT landscape.Our common technology platform is designed to ensure our IT landscapes efficiency and reliability while maintaining a high degree of flexibility by means of a modular setup centered on an application-programming interface(“API”).This includes a continued focus on a clear cloud strategy.Using the cloud enables us to achieve greater stability and shorter recovery times,while at the same time enhancing the flexibility of our workloads performance.E.ON has migrated more than 95 percent of applications from its data centers to the cloud,and we are already seeing that the cloud makes our data landscape more stable and secure.It forms the basis for the modernization of our business processes and simplifies and accelerates the development of new digital services for the energy transition.The digitalization of our Group provides us with greater efficiency,higher security,and more flexibility for swifter scaling.In a dynamic market environment like ours,digitalization can give us a significant competitive advantage.In addition,we are committed to providing our entire workforce with adequate training and development.We rolled out a new digital learning platform that provides all our employees with the skills they need to propel the digitalization of our business processes and products according to their individual requirements.These efforts are supported by a growing core of digital experts who promote digitalization projects in all our Combined Group Management Report Contents Search Back About this Report Corporate Profile Climate Protection and Environmental Management Employees and Society Governance Sustainable Finance Business Report Forecast Report Risks and Chances Report Internal Control System Disclosures Regarding Takeovers 34 E.ON Integrated Annual Report 2023 business areas and by equipping all employees with the modern technical tools they need for their daily work.In 2023 E.ON also reassigned its central innovation activities to its digital division.The new organizational setup reflects E.ONs conviction that digital innovations in particularlike Elna,a smart meter service we launched in Sweden,and Evercharge,a solution for preventing charging point outagesare key value drivers in the energy transition.These are all important steps on the path to a sustainable transformation of the energy system.It is a long-term task and requires political support and appropriate framework conditions.It is becoming increasingly clear that the energy transition has reached one of its larger challenges:the heating transition.This will require considerable investments in networks and a fundamental reconfiguration of the entire infrastructure.Being an active partner to around 6,000 municipalities in Germany positions E.ON well to successfully support and implement municipal heat planning and Germanys Building Energy Act.E.ON laid the foundation stone for the energy transition in the heating sector by creating a digital heat map for municipalities and citizens,which we officially presented to the Federal Minister for Housing,Urban Development,and Construction in November 2023.The use of hydrogen as a substitute for coal,gas,and oil in industry will continue to play an important role in the transformation of the energy system.Extensive investment in energy infrastructure is necessary here,too.All of this offers us new opportunities and again reaffirms E.ONs strategic course.“Making new energy work”We are the playmaker of change in the energy industry.Leading the way for innovative,sustainable,digital-first solutions that transforming the way Europe is powered for all.This clear purpose send an unmistakeable message.It indicatesas our mission statement already impliesthat we will continue to emphatically implement our established strategy whose three key elements are sustainability,digitalization,and growth.Sustainability E.ONs strategy fits seamlessly with the European Unions decarbonization agenda.Europes distribution networksE.ONs biggest businessare where the energy transition is happening.The investments necessary to upgrade,expand,and digitalize these networks through 2030 are estimated at over 425 billion.The European Commissions desire to accelerate this expansion will be an additional driver.Climate protection will be one of the key drivers of E.ONs future growth.The Science Based Targets initiative(“SBTi”)validated E.ONs climate targets in May 2022.They are consistent with keeping global warming to 1.5C above preindustrial levels.In addition,E.ON pledges for its Scope 1 and 2 emissions to achieve climate neutrality by 2040(and to cut Scope 1 and 2 emissions by roughly 75 percent by 2030).E.ON intends for its Scope 3 emissions to be climate-neutral by 2050(and to reduce them by about 50 percent by 2030).All reductions are relative to 2019.These objectives set a course that is both ambitious and viable:a reduction path consistently aligned with the new energy world and E.ONs strategy.In addition,E.ON voluntarily offsets a portion of the emissions it is currently unable to avoid.Offsets help fund measures that prevent or remove carbon emissions outside our value chain.All offsets are currently not factored into E.ONs climate targets,but rather are made at the product level.E.ONs most important offsetting program is the partnership it has had since 2021 with the LEAF Coalition,which stands for Lowering Emissions by Accelerating Forest Finance.LEAF offsets help protect tropical forests and manage them sustainably.E.ONs LEAF program will initially run through year-end 2027.ESG aspects are systematically embedded into E.ONs central control and management processes.In addition,each business units management team is responsible for taking action to enhance sustainability and to meet the units sustainability targets.This decentralized approach enables the units to contribute to E.ONs Group-wide targets for issues like climate protection and corporate governance,while also tailoring their actions to their specific needs.Each unit has sustainability staff who reinforce awareness,coordinate projects and initiatives,and monitor progress toward targets.They share information at regular intervals with our Sustainability Council and the E.ON Groups Sustainability team.Digitalization Digitalization will be a cornerstone of the energy landscape of the future.The transition toward an interconnected,volatile,and networked energy world is being accompanied by increasing complexity that can only be managed through comprehensive digitalization.Digitalization is thus an important lever in E.ONs growth strategy and the basis for generating additional value in its core business over the long term.E.ONs objective is to become one of the leading digital energy companies and to fundamentally transform its products,processes,and services into data-driven and highly interconnected solutions.Our digital transformation is proceeding along four strategic pathways:optimizing internal operations,engaging customers and partners,transforming and developing new business areas,and enhancing employees digital skills.The centerpiece of our digital transformation is a common technology platform(“CTP“)for the entire Group.The CTP will serve as the basis for standardizing and harmonizing all applications in the E.ON Group necessary for the energy transition now and in the future.It will enable us to develop new digital energy solutions while maintaining the highest security standards.The foundation of E.ON One has enabled the E.ON Group to pursue the objective of offering and operating innovative digital energy solutions for the external market and for E.ON Group companies.E.ON Ones portfolio is formed by targeted investments in E.ONs own innovations and in startups.This will make it possible to smartify networks and render energy consumption more Combined Group Management Report Contents Search Back About this Report Corporate Profile Climate Protection and Environmental Management Employees and Society Governance Sustainable Finance Business Report Forecast Report Risks and Chances Report Internal Control System Disclosures Regarding Takeovers35 E.ON Integrated Annual Report 2023sustainably.E.ON One focuses on three business areas:grid management,grid operations,and energy management solutions.These areas form the basis of a successful energy transition.E.ON One offers a wide range of energy management solutions that give customers more transparency about their consumption and that aims to optimize consumption and generation.Energy Networks top priorities include standardization,smartification,and the development of new digital solutions all with the highest cybersecurity standards.Digitalization helps E.ON operate its networks even more efficiently and optimally manage the growing proportion of power from renewable generating facilities.The development of digital solutions like smart eMobility charging solutions as well as new services in front of and behind standard residential meters and smart meters are also part of E.ONs growth strategy.Growth E.ONs core business consists of two segments:Energy Networks and Customer Solutions.E.ON operates power and gas networks in various regions of Europe and offers a broad range of customer solutions.The two businesses complement each other amid the transformation of global energy systems.They are also clear growth businesses that benefit from the sustainable transformation of various customers and industrial sectors.As a result,E.ONs business opportunities are expanding as well.Our growth strategy also fits seamlessly with Europes decarbonization ambitions:because of the ongoing build-out of renewables and the resulting greater challenges for power networks,systemic change in power distribution networks will,as already mentioned,require investments of more than 425 billion.According to the most recent statements by the German Federal Network Agency,about 150 billion of investments will be required for distribution networks in Germany alone.E.ONs distribution networks alone will connect several million new renewables facilities over this time period.In addition,the growth in the aggregate energy demand of E.ONs customer groups is estimated to increase by more than 100 percent between 2020 and 2050.A sustainable transformation of the economy is necessary for this as well.E.ON is aiming for earnings growth in both the Energy Networks and Customer Solutions segments,supported by continual efficiency improvements.The focus is primarily on achieving operational excellence.We are likewise aware that our growth strategy will only be successful if it is accompanied by changes within our organization,such as cultural change,diversity,and education.Growth in the Energy Networks Segment The transition to a new,sustainable,and interconnected energy world will require considerable investments in physical and digital assets.As stated above,this applies above all to the Energy Networks segment,whose Networks are the platform for a successful energy transition.Ongoing renewables expansion in particular will require grids to grow at a similar pace.New network connections and connected load will increase sharply amid the energy transition owing to changes in customer behaviour.The energy transition alone therefore represents an unprecedented growth opportunity for E.ON,an opportunity that is being further accelerated by the current developments in Europes energy system.Consequently,this growth will be accompanied by a suitable and sensible digitalization of networks because they are a key component of E.ONs growth strategy and a prerequisite for the implementation of the energy and climate transition in distribution networks.The use of smart-grid technology(such as smart energy meters and smart transformer stations),the integration of external data,and the standardization of construction and operating processes will make it possible to realize considerable potential.Where necessary for technical reasons and economically feasible,E.ON will acquire the capability to monitor and control its distribution networks across all voltage levels in order to optimize their operation.Sensors and smart metering and control technology will enable real-time control of distributed generation and consumption.The energy and heat transitions will alter the role of gas networks as well.E.ON is already working on plans,such as making gas network infrastructure hydrogen-ready.E.ON will therefore,where legally possible and economically sensible,make its existing gas networks hydrogen-ready.These investments will help pave the way toward climate-neutral gas networks.This is among the reasons why E.ON is one of Europes leading distribution system operators.E.ON has a regulated asset base(“RAB”)of 42 billion,and its regulated business generates a large share of its EBITDA.E.ONs strategic objective is therefore to remain Europes leading energy and infrastructure partner.A large portion of investments during the 20242028 planning period will again go toward network expansion and a variety of network projects.The Forecast Report contains details about planned investments.Growth in the Customer Solutions Segment The Customer Solutions segment focuses on the offering of energy solutions(such as Future Energy Home or“FEH,”eMobility,and green gas)and the decentral activities of the Energy Infrastructure Solutions(“EIS“)business,as well as power and gas sales.This is a scalable business model with comparatively low capital requirements and focuses on private households and small and medium-sized enterprises.E.ONs objective for this business is to retain its roughly 47 million customers(including customers in Turkey and at ZSE in Slovakia)in the long term by offering them sustainable energy solutions and services and thus reducing their environmental footprint and reaching energy conservation targets,particularly regarding residential customers gas consumption.So that this objective can be achieved at competitive costs,E.ON systematically pursues digitalization which promotes optimal operational efficiency,superior customer satisfaction and loyalty(customer relationship management),and cross-selling opportunities.In addition,E.ON focuses primarily on offering distributed energy systems for households,such as the self-generation of green solar power,energy storage,heat,and eMobility solutions.The European Commissions solar strategy for the EU,which includes the target of doubling Europes solar power capacity by 2025,remains an additional growth driver.Combined Group Management Report Contents Search Back About this Report Corporate Profile Climate Protection and Environmental Management Employees and Society Governance Sustainable Finance Business Report Forecast Report Risks and Chances Report Internal Control System Disclosures Regarding Takeovers 36 E.ON Integrated Annual Report 2023 The expansion of suitable eMobility infrastructure is another key strategic pillar.The eMobility market continues to undergo change and is characterized by strong growth:policymakers want at least 15 million electric vehicles to be registered in Germany by 2030.The time for rapid growth activities is now,because all attractive locations for the charging infrastructure necessary for this objective will presumably have been allocated in the years ahead.Our objective is to enlarge our current market position and become one of Europes leading operators of charging infrastructure by 2030.In 2023 E.ON sold 23,923 charging points for residential and business customers in many European countries.EISs activities encompass innovative energy solutions that aim to help cities,municipalities,and industrial customers achieve their climate targets cost-effectively.E.ON aims for its EIS business unit to achieve additional growth and become the preferred transformation partner for sustainable,innovative energy solutions.EISs core business consists of a portfolio of solutions for decentral power,heat,and cooling plants as well as solutions for energy efficiency and decarbonization along with other energy services.E.ON sees green hydrogen in particular as a key strategic growth opportunity over the medium term,and founded E.ON Hydrogen GmbH to meet rising demand for green gases in the future.Hydrogen will play an essential role in the climate-neutral energy system of the future.E.ON plans to develop a national and international hydrogen business.Our international footprint in Europe gives us optimal local conditions for future hydrogen clusters,for example in the North Sea region.Selected partnerships for developing this business include,for example,French energy company EDF,Everwind Fuels,Tesla,and Fortescue Future Industries.E.ON is thus well positioned to propel the energy transition and satisfy the increasing demand for sustainable solutions.All business units benefit from robust growth in the demand for green power and gas across all sectors(households,transportation,buildings,and industry).Commitment to the UN Sustainable Development Goals The United Nations Sustainable Development Goals(“SDGs”)of its 2030 Agenda for Sustainable Development provide a blueprint for a better and more sustainable future.Adopted in 2015,the 17 SDGs and 169 subgoals address a wide range of global challenges.We recognize the SDGs importance.Our Management Board underscored this support by issuing a self-commitment to the SDGs in June 2018.E.ONs core business activities enable it to play a considerable role in fostering the SDGs 7(Affordable and Clean Energy),11(Sustainable Cities and Communities),and 13(Climate Action).All of E.ONs other contributions to the UN SDGs can be found in the SDG Index.Finance Strategy The section of the Combined Group Management Report entitled Financial Situation as well as the E.ON on Capital Markets chapter contain explanatory information about E.ONs finance strategy.People Strategy The sections of the Combined Group Management Report entitled Working Conditions and Diversity and Inclusion contain explanatory information about the main components of E.ONs people strategy as well as statements about diversity at E.ON.Innovation Innovations:Pioneering New Solutions En Route to Climate Neutrality At E.ON,we focus on innovations to develop new solutions en route to climate neutrality.They help us quickly and reliably design safe,user-friendly digital products,processes,and systems for our Energy Networks and Customer Solutions segments as well as the E.ON organization.Our Innovation division focuses on developing new customer solutions and deploying new technologies while assessing the opportunities and possibilities as well as the risks associated with the use of modern technology.The public and scientific-technological debate about artificial intelligence(“AI”)and generative AI or Gen AI has led E.ON,too,to take a close look at their opportunities and risks.For example,E.ON is testing various Gen AI solutions for integrated knowledge and information flows,information on strategic trends,improved operational planning,the design and implementation of business processes,and for the creation of value for customers and employees.Collaboration in Global Networks and Partnerships Accelerates Innovations E.ON has worked in recent years to establish Group-wide structures and processes for in-house collaboration and partnerships to develop innovations.E.ON is convinced that new business models that are significant for its future business can be developed better,more easily,and faster in collaboration with universities and other scientific institutions as well as various partners and networks of a global innovation ecosystem.In 2023 this integrated partnership approach enabled E.ON to extend its position in the implementation of energy transition projects as well as in innovation.E.ON manages two key business initiatives,known as innovation engines,to deploy innovations generated by outside start-ups,by Combined Group Management Report Contents Search Back About this Report Corporate Profile Climate Protection and Environmental Management Employees and Society Governance Sustainable Finance Business Report Forecast Report Risks and Chances Report Internal Control System Disclosures Regarding Takeovers 37 E.ON Integrated Annual Report 2023 universities,and in-house as quickly as possible in its operating business:E.ON Group Innovation GmbH(“EGI”)is our intragroup incubator and accelerator:EGIs business objective is to implement innovation projects together with our core business units and develop them quickly into marketable products and services.EGI is also responsible for our partnerships with universities,such as the Energy Research Center,a joint venture between E.ON and RWTH Aachen University,and our partnership with the Bits&Watts program at Stanford University in California.E.ON One GmbH(see page 34)is a growth and sales platform for market-ready digital solutions.E.ON One acquires startups,integrates their digital solutions into E.ONs system architecture to ensure their scalability and operational reliability,and markets them to distribution network and sales companies in and outside E.ON.These innovation engines and close collaboration with the business units innovation activities enable E.ON to ensure that it implements its innovation strategy effectively and efficiently.Energy Research:Foundation for Developing Climate-neutral Innovations E.ON conducts extensive research activities to gain important insights into key strategic technologies and developments of the future.We focus on four topics:technology forecasts and analyses,the establishment and design of distributed sustainable energy systems,and the development of programs for comprehensive decarbonization and sustainable heat supply.In 2023 E.ONs research and technology team again extended its international academic influence through a collaboration with Stanford University in California.We also successfully completed 16 projects as part of our long-standing partnership with RWTH Aachen University in Germany;19 more are currently in progress,including strategically important and business-oriented projects,such as Ectocontrol,whose purpose is to deliver optimal,holistic,and data-based control of Ectogrid,E.ONs fifth-generation low-temperature grid.Global Innovation Ecosystem Affords Access to New Technologies and Solutions In 2023 E.ON successively expanded its collaboration with global partners,whose networks yield innovation projects and the development of new business models.E.ON is thus pursuing its goal of drawing on a consistently well-filled innovation pipeline to continually deploy innovations in its operating business.In addition,E.ON tests the possibilities of new business activities,particularly together with its innovation teams in Silicon Valley(United States)and Tel Aviv(Israel),and monitors the development of disruptive innovations in which it sees the potential to generate new business opportunities or set market standards.Global Partner Network Helps Deploy Innovations across E.ON Group Since 2018,E.ON has worked with six other multinational energy utilities from Europe,North America,Australia,and Asia in Free Electrons,a global accelerator program.The aim is to jointly identify promising startup solutions that enable and accelerate the energy transition.In 2023 we reached two new milestones:we entered into partnerships with U.S.-based Rondo to use heat storage help decarbonize industrial processes and with Naked Energy of the United Kingdom,whose solar thermal and hybrid technology we use to develop renewable heat solutions for large-scale industrial and urban decarbonization projects.E.ON held its successful Grid Startup Challenge innovation program for the fifth year running in 2023.All 18 E.ON network companies participated.The 2023 event again yielded six new pilot projects that help make network infrastructure more efficient,sustainable,and resilient.For example,international startups Qube and Aeromon support E.ON subsidiary Westenergie by providing autonomous,compact laser sensors for detecting methane leaks in gas distribution networks.Another startup,Neuron Soundware,supplies E.ON with an AI-based technology that uses acoustic signals to swiftly detect and analyze faults in substations.Seagrass:A New Concept for Trading Carbon Certificates Seagrass Limited,a new E.ON subsidiary founded in 2023,is tapping the potential of the voluntary carbon market to accelerate the transition to net-zero emissions and propel decarbonization globally.One example is the Seagrass Carbon Map.It shows the locations and projects that back carbon certificates.Seagrass also increases transparency in the carbon certificate market by providing additional informationsuch as satellite images,land use,and biomass dataon the projects locations.A prototype of the Seagrass Carbon Map was presented at COP28,the UN Climate Change Conference in Dubai.Seagrass holds a financial services permission,which allows it to act as an intermediary on the carbon certificate market and bring together the markets supply and demand sides.Seagrass cooperates with an established exchange(ACX)to process carbon certificate purchases and sales.Central Innovation Projects and Scale Hubs:Two Successful,Mutually Beneficial Approaches to Innovation E.ONs central innovation projects are initiated in response to specific challenges and requests from its units.The central Innovation division alone managed 117 innovation projects in 2023.It also launched 76 new projects and handed 40 over to our units to be integrated into the operating business.The innovation projects handed over in 2023 alone currently promise an estimated 230 million in sales growth over the next five years.An example of these innovations is an pilot project for dynamic pricing for public electric-vehicle charging that E.ON is currently conducting in Copenhagen.The Industry Innovations team is running another project called Zero.ON,which aims to help small and medium-sized enterprises record and quantify their carbon emissions.Combined Group Management Report Contents Search Back About this Report Corporate Profile Climate Protection and Environmental Management Employees and Society Governance Sustain
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UNITED STATESSECURITIES AND EXCHANGE COMMISSIONWashington,D.C.20549FORM 10-K ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)OF THE SECURITIES EXCHANGE ACT OF 1934For the fiscal year ended February 24,2024OR TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)OF THE SECURITIES EXCHANGE ACT OF 1934For the transition period from _ to _Commission File Number:001-39350Albertsons Companies,Inc.(Exact name of registrant as specified in its charter)Delaware 47-4376911(State or other jurisdiction of incorporation or organization)(I.R.S.Employer Identification No.)250 Parkcenter Blvd.Boise,Idaho,83706(Address of principal executive offices and zip code)(208)395-6200(Registrants telephone number,including area code)Securities registered under Section 12(b)of the Exchange Act:Title of each classTrading Symbol(s)Name of each exchange on which registeredClass A common stock,$0.01 par valueACINew York Stock ExchangeSecurities registered under Section 12(g)of the Exchange Act:None Indicate by check mark if the registrant is a well-known seasoned issuer,as defined in Rule 405 of the Securities Act.Yes No Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d)of the Act.Yes No 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 12months(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 No Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T duringthe preceding 12 months(or for such shorter period that the registrant was required to submit such files).Yes No Indicate by check mark whether the registrant is a large accelerated filer,an accelerated filer,a non-accelerated filer,a smaller reporting company,or an emerging growthcompany.See the definitions of large accelerated filer,accelerated filer,smaller reporting company,and emerging growth company in Rule 12b-2 of the Exchange Act.Large accelerated filerAccelerated filerNon-accelerated filerSmaller reporting companyEmerging growth companyIf an emerging growth company,indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financialaccounting standards provided pursuant to Section 13(a)of the Exchange Act.Indicate by check mark whether the registrant has filed a report on and attestation to its managements assessment of the effectiveness of its internal control over financialreporting under Section 404(b)of the Sarbanes-Oxley Act(15 U.S.C.7262(b)by the registered public accounting firm that prepared or issued its audit report.If securities are registered pursuant to Section 12(b)of the Act,indicate by check mark whether the financial statements of the registrant included in the filing reflect thecorrection of an error to previously issued financial statements.Indicate by check mark whether any of those error corrections are restatements that required a recovery analysis of incentive-based compensation received by any of theregistrants executive officers during the relevant recovery period pursuant to 240.10D-1(b).Indicate by check mark whether the registrant is a shell company(as defined in Rule 12b-2 of the Exchange Act).Yes No As of September 8,2023,the last business day of the registrants most recently completed second fiscal quarter,the aggregate market value of the registrants common stock heldby non-affiliates was approximately$9.9 billion.As of April 18,2024,the registrant had 577,407,663 shares of Class A common stock,par value$0.01 per share,outstanding.DOCUMENTS INCORPORATED BY REFERENCEItems 10,11,12,13 and 14 of Part III incorporate information by reference from the registrants definitive proxy statement related to its 2024 Annual Meeting of Stockholders,tobe filed with the Securities and Exchange Commission within 120 days after the end of the fiscal year ended February 24,2024(the Proxy Statement).Albertsons Companies,Inc.and Subsidiaries PagePART I4Item 1-Business8Item 1A-Risk Factors14Item 1B-Unresolved Staff Comments30Item 1C-Cybersecurity31Item 2-Properties33Item 3-Legal Proceedings33Item 4-Mine Safety Disclosures34PART II35Item 5-Market for Registrants Common Equity,Related Stockholder Matters and Issuer Purchases of Equity Securities35Item 6-Reserved37Item 7-Managements Discussion and Analysis of Financial Condition and Results of Operations38Item 7A-Quantitative and Qualitative Disclosures About Market Risk50Item 8-Financial Statements and Supplementary Data52Item 9-Changes in and Disagreements with Accountants on Accounting and Financial Disclosure101Item 9A-Controls and Procedures102Item 9B-Other Information102Item 9C-Disclosure Regarding Foreign Jurisdictions that Prevent Inspections102PART III103Item 10-Directors,Executive Officers and Corporate Governance103Item 11-Executive Compensation103Item 12-Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters103Item 13-Certain Relationships and Related Transactions,and Director Independence103Item 14-Principal Accountant Fees and Services103PART IV104Item 15-Exhibits,Financial Statement Schedules104Item 16-Form 10-K Summary108SIGNATURES109Table of ContentsAs used in this Annual Report on Form 10-K,unless the context otherwise requires,references to Albertsons,the Company,ACI,we,us and our refer to Albertsons Companies,Inc.and,where appropriate,its consolidated subsidiaries.Our last three fiscal years consisted ofthe 52 weeks ended February 24,2024(fiscal 2023),the 52 weeks ended February 25,2023(fiscal 2022)and the 52 weeks ended February26,2022(fiscal 2021).Our next three fiscal years consist of the 52 weeks ending February 22,2025(fiscal 2024),the 53 weeks endingFebruary 28,2026(fiscal 2025),and the 52 weeks ending February 27,2027(fiscal 2026).PART ISPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTSThis Annual Report on Form 10-K includes forward-looking statements within the meaning of the federal securities laws.The forward-looking statements include our current expectations,assumptions,estimates and projections about our business,our industry and the outcome ofthe Merger.They include statements relating to our future operating or financial performance which the Company believes to be reasonable atthis time.You can identify forward-looking statements by the use of words such as outlook,may,should,could,estimates,predicts,potential,continue,anticipates,believes,plans,expects,future,intends and similar expressions which are intended to identifyforward-looking statements.These statements are not guarantees of future performance and are subject to numerous risks and uncertainties which are beyond our control anddifficult to predict and could cause actual results to differ materially from the results expressed or implied by the statements.Risks anduncertainties that could cause actual results to differ materially from such statements include:uncertainties related to the Merger,including our ability to close the transactions contemplated by the Merger Agreement,and the impactof the costs related to the Merger;erosion of consumer confidence as a result of the Merger and the transactions contemplated by the Merger Agreement;changes in macroeconomic conditions and uncertainty regarding the geopolitical environment;rates of food price inflation or deflation,as well as fuel and commodity prices;changes in consumer behavior and spending due to the impact of macroeconomic factors,including the expiration of student loanpayment deferments;challenges in attracting,retaining and motivating our employees until the closing of the Merger;failure to achieve productivity initiatives,unexpected changes in our objectives and plans,inability to implement our strategies,plans,programs and initiatives,or enter into strategic transactions,investments or partnerships in the future on terms acceptable to us,or at all;changes in wage rates,ability to attract and retain qualified associates and negotiate acceptable contracts with labor unions;litigation related to the transactions contemplated by the Merger Agreement;restrictions on our ability to operate as a result of the Merger Agreement;availability and cost of goods used in our food products;challenges with our supply chain;operational and financial effects resulting from cyber incidents at the Company or at a third party,including outages in the cloudenvironment and the effectiveness of business continuity plans during a ransomware or other cyber incident;and continued reduction in governmental assistance programs such as SNAP.4Table of ContentsAll forward-looking statements attributable to us or persons acting on our behalf are expressly qualified in their entirety by these cautionarystatements and risk factors.Forward-looking statements contained in this Annual Report on Form 10-K reflect our view only as of the date ofthis Annual Report.We undertake no obligation,other than as required by law,to update or revise any forward-looking statements,whether as aresult of new information,future events or otherwise.In evaluating our financial results and forward-looking statements,you should carefully consider the risks and uncertainties more fully describedin the section of this Annual Report on Form 10-K entitled Risk Factors.Consequently,all of the forward-looking statements we make in thisAnnual Report on Form 10-K are qualified by the information contained in this section and the information discussed under Part IItem 1A.Risk Factors.SUMMARY RISK FACTORSThe following is a summary of the principal factors that create risk in investing in our securities:Risks Related to Our Business and OperationsRisks related to:general economic conditions affecting the food and drug retail industry and various operating factors;availability of a significant amount of energy to manufacture,store,transport and sell products;failure to realize anticipated benefits from our productivity initiatives;andimpact of environmental,social and governance matters,including inability to meet goals and commitments established in relation tosuch matters.Risks Related to the MergerRisks related to:the Merger Agreement and the pendency of the Merger;restrictions on our business activities while the Merger Agreement is in effect;litigation related to the Merger;the ability to complete the Merger and the transactions contemplated by the Merger;andsignificant delay or the failure to complete the Merger.Risks Related to Our IndustryRisks related to:intensity of the competition in our industry;our ability to timely identify or effectively respond to consumer trends;consolidation in the healthcare industry;andproviding pharmacy products and services and the adequacy of our insurance to cover any claims.5Table of ContentsRisks Related to Our Supply ChainRisks related to:product and raw material supply disruptions,especially of fresh products,including from severe weather,natural disasters and climatechange;threats or potential threats to security of food and drug safety,including the occurrence of a widespread health epidemic and/orpandemic,and loss of consumer confidence in the supply chain;andavailability and increased prices of fuel or commodities.Risks Related to Our WorkforceRisks related to:our relationship with unions,including labor disputes or work stoppages,and increased pension expenses,contributions and surcharges;increases to the minimum wage and changes to wage regulations;andthe failure to attract and retain qualified associates.Legal and Regulatory RisksRisks related to:unfavorable changes in government regulation and environmental laws;unfavorable changes in the tax code;legal or other proceedings;andour use of insurance and self-insurance to address potential liabilities.Risks Related to Information Security,Cybersecurity,Data Privacy and Evolving TechnologiesRisks related to:our dependence on IT systems;improper activities by third parties and the loss of confidence from a data security incident involving our customers,employees orvendors;andthe use of artificial intelligence in our business.Risks Related to Our IndebtednessRisks related to:our level of indebtedness and our ability to generate cash;our debt instruments limiting our flexibility in operating our business;andincreases in interest rates,a downgrade of our credit ratings and/or instability in credit markets.Risks Related to Owning Our Common StockRisks related to:the volatility of the price of our common stock and the possibility of a decline regardless of our operating performance;our largest stockholder may have conflicts of interest with other stockholders in the future;6Table of Contentsprovisions in our charter documents and Delaware law and certain other agreements that could delay or prevent a change of control;andour ability to pay dividends to our stockholders.See Part IItem 1A.Risk Factors for a more complete discussion of the material risks facing our business.NON-GAAP FINANCIAL MEASURESWe define EBITDA as generally accepted accounting principles(GAAP)earnings(net loss)before interest,income taxes,depreciation andamortization.We define Adjusted EBITDA as earnings(net loss)before interest,income taxes,depreciation and amortization,further adjusted toeliminate the effects of items management does not consider in assessing our ongoing core performance.We define Adjusted net income asGAAP net income adjusted to eliminate the effects of items management does not consider in assessing our ongoing core performance.Wedefine Adjusted net income per Class A common share as Adjusted net income divided by the weighted average diluted Class A common sharesoutstanding,as adjusted to reflect all restricted stock units and awards outstanding at the end of the period,as well as the conversion ofConvertible Preferred Stock when it is antidilutive for GAAP.See Part IIItem 7.Managements Discussion and Analysis of FinancialCondition and Results of Operations for further discussion and a reconciliation of Adjusted EBITDA,Adjusted net income and Adjusted netincome per Class A common share.EBITDA,Adjusted EBITDA,Adjusted net income and Adjusted net income per Class A common share(collectively,the Non-GAAPMeasures)are performance measures that provide supplemental information we believe is useful to analysts and investors to evaluate ourongoing results of operations,when considered alongside other GAAP measures such as net income,operating income,gross margin and netincome per Class A common share.These Non-GAAP Measures exclude the financial impact of items management does not consider inassessing our ongoing core operating performance,and thereby provide useful measures to analysts and investors of our operating performanceon a period-to-period basis.Other companies may have different definitions of Non-GAAP Measures and provide for different adjustments,andcomparability to our results of operations may be impacted by such differences.We also use Adjusted EBITDA for board of director and bankcompliance reporting.Our presentation of Non-GAAP Measures should not be construed as an inference that our future results will be unaffectedby unusual or non-recurring items.Non-GAAP Measures should not be considered as measures of discretionary cash available to us to invest in the growth of our business.Wecompensate for these limitations by relying primarily on our GAAP results and using Non-GAAP Measures only for supplemental purposes.7Table of ContentsItem 1-BusinessOverviewAlbertsons is one of the largest food and drug retailers in the United States,with both strong local presence and national scale.We alsomanufacture and process some of the food for sale in our stores.We maintain a website(www.A)that includesadditional information about the Company.We make available through our website,free of charge,our annual reports on Form 10-K,ourquarterly reports on Form 10-Q,our current reports on Form 8-K and our interactive data files,including amendments to those reports.Theseforms are available as soon as reasonably practicable after we have filed them with,or furnished them electronically to,the Securities andExchange Commission(SEC).Additionally,all of our filings with the SEC can be accessed on the SECs website at www.sec.gov.Retail OperationsAs of February 24,2024,we operated 2,269 stores across 34 states and the District of Columbia under more than 20 well known bannersincluding Albertsons,Safeway,Vons,Pavilions,Randalls,Tom Thumb,Carrs,Jewel-Osco,Acme,Shaws,Star Market,United Supermarkets,Market Street,Haggen,Kings Food Markets and Balduccis Food Lovers Market.Additionally,as of February 24,2024,we operated 1,725pharmacies,1,336 in-store branded coffee shops,402 adjacent fuel centers,22 dedicated distribution centers,19 manufacturing facilities andvarious digital platforms.Our stores operate in First-and-Main retail locations and have leading market share within attractive and growinggeographies.We hold a#1 or#2 position by market share in 70%of the 121 metropolitan statistical areas(MSAs)in which we operate.Ourportfolio of well-located,full-service stores provides the foundation of our omnichannel platform,and we have continued to enhance ourcapabilities,including automated self-checkout options,to meet customer demand for convenience and flexibility.Our Drive Up&Go curbsidepickup service is offered in more than 2,200 locations and we offer delivery services across more than 2,100 of our stores.In our deliveryservice,we have expanded the number of stores with in-house delivery services,and in our third-party services we have continued to partnerwith Instacart,DoorDash and Uber to engage with customers on the platform of their choice.Our Customers for Life transformation strategy isanchored on placing the customer at the center of everything we do,with the ultimate goal of supporting them every day,every week,and for alifetime.We seek to tailor our offerings to local demographics and preferences of the markets in which we operate.Our Locally Great,Nationally Strong operating structure empowers decision making at the local level,which we believe better serves our customers andcommunities,while also providing the technology platforms,systems,analytics and buying power afforded by an organization with nationalscale.SegmentsWe are engaged in the operation of food and drug retail stores that offer grocery products,general merchandise,health and beauty care products,pharmacy,fuel and other items and services in our stores or through digital channels.Our retail operating divisions are geographically based,have similar economic characteristics and similar expected long-term financial performance.Our operating segments and reporting units aremade up of 12 divisions,which are reported in one reportable segment.Each reporting unit constitutes a business for which discrete financialinformation is available and for which management regularly reviews the operating results.Across all operating segments,the Company operatesprimarily one store format.Each division offers,through its stores and digital channels,the same general mix of products with similar pricing tosimilar categories of customers,has similar distribution methods,operates in similar regulatory environments and purchases merchandise fromsimilar or the same vendors.8Table of ContentsProductsOur stores offer grocery products,general merchandise,health and beauty care products,pharmacy,fuel and other items and services.We are notdependent on any individual supplier;only one third-party supplier represented more than 5%of our sales for fiscal 2023.Merchandising and ManufacturingOur Own Brands portfolio provides high-quality products to our customers at a great value,offering more than 14,000 unique items.The OwnBrands portfolio includes but is not limited to the registered trademarks Signature SELECT,O Organics,Open Nature,Signature Caf,Lucerne,Waterfront BISTRO,Primo Taglio,Signature Care,Signature Reserve and Value Corner.Our Own Brands productsresonate well with our customers,as evidenced by Own Brands sales of$16.5 billion in fiscal 2023.As measured by units for fiscal 2023,10.1%of our Own Brands products were manufactured in Company-owned facilities,and the remainderwas purchased from third parties.We closely monitor make-versus-buy decisions to optimize their quality and profitability.In addition,webelieve that our scale will provide opportunities to leverage our fixed manufacturing costs in order to drive innovation across our Own Brandsportfolio.As of February 24,2024,we operated 19 food production plants.These plants consisted of seven milk plants,three soft drink bottlingplants,three bakery plants,two ice cream product plants,two grocery/prepared food plants,one ice plant and one soup plant.Intellectual PropertyOur banners,brand image and Own Brands portfolio are significant to our business strategy.We own numerous registered trademarks andservice marks and seek to obtain and preserve intellectual property protection of our marks and to ensure that any third-party uses are properlylicensed.DistributionAs of February 24,2024,we operated 22 strategically located distribution centers,approximately 36%of which are owned or ground-leased.Our distribution centers collectively provide approximately 63%of all products to our retail operating areas.Marketing and AdvertisingOur marketing efforts involve collaboration between our national marketing and merchandising team and local divisions and stores.We augmentthe local division teams with corporate resources and are focused on providing expertise,sharing best practices and leveraging scale inpartnership with leading consumer packaged goods vendors.Our corporate teams support divisions by providing strategic guidance in order todrive key areas of our business,including pharmacy,general merchandise and our Own Brands.Our local marketing teams set brand strategyand communicate brand messages through our integrated digital and physical marketing and advertising channels.We devote significant resources to differentiating our banners in the local markets where we operate and invest in loyalty programs to drivetraffic through our omnichannel approach.Our local merchandising teams spend considerable time working with store directors to make sure weare satisfying consumer preferences.We also strive to achieve and maintain favorable recognition of our Own Brands offerings by marketingthem to consumers and enhancing value for consumers,particularly in respect of branded products.We measure price competitiveness through systematic,selective and thoughtful price investment to drive customer traffic and basket size.Wealso use our loyalty program to target promotional activity and improve our customers9Table of Contentsexperience.This includes leveraging customer and transaction information with data driven analytics to provide both personalized deals anddigital coupons,as well as gas and grocery rewards.We have 39.8 million members currently enrolled in our loyalty program.We have achievedsignificant success with active participants in our loyalty program,which drives higher sales and customer retention.We have recently deployedand are continuing to refine cloud-based enterprise solutions to quickly process proprietary customer,product and transaction data and efficientlyprovide our local managers with targeted marketing strategies for customers in their communities.In addition,we use data analytics to optimizeshelf assortment and space in our stores by continually and systematically reviewing the performance of each product.In our digital strategies,we capitalize on our rich and proprietary data under our Albertsons Media Collective(AMC).AMC offers new andexisting business partners a robust digital marketing platform that reaches our extensive customer network and leverages our strong marketshare,especially in the 70%of MSAs where we hold a#1 or#2 share position.We believe AMC will be a contributor to our growth and a profitdriver in the future.Raw MaterialsVarious agricultural commodities constitute the principal raw materials used by us in the manufacture of our food products.Although historicallyraw materials for our products have not been in short supply and have been readily available,see Part IItem 1A.Risk Factors regarding thepotential adverse impact on our results of operations due to the lack of,or reduced availability of,raw materials.EnvironmentalOur operations are subject to regulation under environmental laws,including those relating to waste management,air emissions and undergroundstorage tanks.In addition,as an owner and operator of commercial real estate,we may be subject to liability under applicable environmentallaws for clean-up of contamination at our facilities.Compliance with and clean-up liability under these laws has not had and is not expected tohave a material adverse effect upon our business,financial condition,liquidity or operating results.We work hard to maintain the highest standards of environmental stewardship(including procuring and offering sustainably sourced products).During fiscal 2023,we recycled more than 865 million pounds of cardboard and more than 25 million pounds of plastic bags and film from ouroperations and completed over 500 energy efficiency projects.Moreover,100%of our Own Brands Waterfront BISTRO and Open Natureseafood is sourced to meet our Responsible Seafood Policy.Human CapitalAs one of the largest food and drug retailers in the U.S.,serving 35.3 million customers per week,we recognize that our success and ability todelight our customers lies in the engagement of our associates.We remain committed to attracting,developing and retaining associates byfostering a diverse and inclusive culture through our investment in talent development and supporting the personal health and well-being ofassociates and their families.As of February 24,2024,we employed approximately 285,000 associates,of which approximately 62%were part-time and approximately200,000 associates were covered by collective bargaining agreements.A significant number of our associates have long tenure and during fiscal2023,more than 61,000 of our associates celebrated at least 15 years of service,and more than 44,000 associates celebrated over 20 years ofservice.We commit to create a workplace where inclusion thrives through diverse representation across all levels of our workforce.In fiscal 2023,weintegrated Belonging into our strategic framework and transitioned to Diversity,Equity,Inclusion&Belonging(DEI&B).To promote DEI&Bamong our associates,we support our associate resource groups(ARGs).The ARGs collectively comprise over 7,000 members and are basedon employee10Table of Contentsinterests.During fiscal 2023,we added our newest ARG the Women of Color(WOC)Alliance,which provides a platform for women ofcolor and their allies through education,awareness,and knowledge.The WOC Alliance joined our existing ARGs,which include the WomensInspiration and Inclusion Network,the Hispanic Leadership Network,the Asian Network,the African American Leadership Council,the PrideAlliance,Recipe for Change Alliance,Veterans Associate Resource Group and diverseABILITY.In 2023,we also introduced an ally componentto our ARGs to enable the participation of any associate who wants to support and take action to help that group.As part of our ongoing commitment,we have integrated DEI&B goals into the performance plans of our top leaders and during fiscal 2023 wesuccessfully integrated Leading With Inclusion(LWI)within our in-house curriculum.We continue to expand opportunities for our associatesto learn more about DEI&B,including facilitated discussions of leaders on how to be more inclusive,and bi-annual store and supply chainhuddles to further embed DEI&B into our frontline.We are proud to offer our associates a myriad of opportunities to grow and advance in their careers.We have a talent management process that isdesigned to enable us to identify and assess talent across the organization and provide equal and consistent opportunities for employees todevelop their skills.Several levels of associates participate in our annual performance management process that includes goal setting,feedbackand development to support their personal growth and development.We engage associates across the organization to provide input through ourannual Associate Experience Survey.We hold regular town hall meetings where any employee can ask questions of executives and make theirvoice heard.We also offer formal and informal learning and development opportunities to all associates through synchronous,asynchronous and hybridexperiences.These offerings include eLearning and on-demand content,virtual and in-person classes,on-the-job training,virtual reality andmentoring programs.In addition to our internal learning offerings,through partnerships with third parties,we offer development programs andconferences to our top talent based on nominations.We are continually evaluating and developing our compensation and benefits programs to offer competitive wages and job-appropriatecompensation.Our benefits are designed to attract and retain our employees and vary from location,seniority and employment status.In additionto comprehensive,accessible and affordable healthcare coverage,we offer paid time off,flexible work schedules,family leave,associateassistance programs and a 401(k)-retirement savings and investment plan.The health and safety of our associates remains at the forefront of our business,and we remain committed to the prevention of injury and illnessthrough strong health and safety management,employee empowerment and accountability,and strict compliance with health and safetyregulations.We are also focused on fostering a safe,open and accountable work environment and we provide a hotline for all associates to reportworkplace concerns and violations.SeasonalityOur business is generally not seasonal in nature,but a larger share of annual revenues may be generated in November and December due to themajor holidays.Competitive EnvironmentThe food and drug retail industry is highly competitive.The principal competitive factors that affect our business are location,price,quality,fresh,service,selection,convenience and condition of assets such as our stores.The operating environment for the food and drug retailingindustry continues to be characterized by intense competition,11Table of Contentsaggressive expansion,increasing specialization of retail and digital formats,entry of non-traditional competitors and consolidation.We face intense competition from supercenters,other food and/or drug retailers,club stores,online retailers,specialty and niche supermarkets,limited assortment stores,drug stores,general merchandisers,wholesale stores,dollar and discount stores,grocery outlets,convenience stores,natural food stores,farmers markets,local chains and stand-alone stores that cater to the individual cultural preferences of specificneighborhoods,restaurants and a growing number of internet-based home delivery and meal solution companies.We and our competitors engagein price and non-price competition which has adversely affected our operating margins.Executive Officers of the RegistrantThe following table sets forth information regarding our executive officers as of April 22,2024:NameAgePositionVivek Sankaran61Chief Executive Officer;DirectorSharon McCollam61President,Chief Financial OfficerAnuj Dhanda61Executive Vice President,Chief Technology&Transformation OfficerOmer Gajial50Executive Vice President,Chief Merchandising&Digital OfficerThomas Moriarty61Executive Vice President,General Counsel and Chief Policy OfficerSusan Morris55Executive Vice President,Chief Operations OfficerRobert Backus51Executive Vice President,Retail Operations,East RegionMichelle Larson47Executive Vice President,Retail Operations,West RegionEvan Rainwater61Executive Vice President,Supply Chain,Manufacturing and Strategic SourcingJennifer Saenz46Executive Vice President,Pharmacy&eCommerceMichael Theilmann60Executive Vice President,Chief Human Resources OfficerVivek Sankaran has served as our Chief Executive Officer and Director since September 2021,and our Chief Executive Officer,President andDirector since April 2019.Prior to joining the Company,since 2009 Mr.Sankaran served in various leadership and executive positions atPepsiCo,Inc.(PepsiCo),a multinational food,snack,and beverage corporation.From January to March 2019,he served as Chief ExecutiveOfficer of PepsiCo Foods North America,a business unit within PepsiCo,where he led PepsiCos snack and convenient foods business.Prior tothat position,Mr.Sankaran served as President and Chief Operating Officer of Frito-Lay North America,a subsidiary of PepsiCo,from April2016 to December 2018,its Chief Operating Officer from February to April 2016 and Chief Commercial Officer,North America,of PepsiCofrom 2014 to February 2016,where he led PepsiCos cross-divisional performance across its North American customers.Prior to joining PepsiCoin 2009,Mr.Sankaran was a partner at McKinsey and Company,where he served various Fortune 100 companies,bringing a strong focus onstrategy and operations.Sharon McCollam has served as our President and Chief Financial Officer since September 2021.Ms.McCollam previously served as ExecutiveVice President,Chief Administrative and Chief Financial Officer at Best Buy Co.Inc.(Best Buy),a multinational consumer electronicsretailer,from 2012 to 2016.Prior to Best Buy,Ms.McCollam held several transformational leadership positions at Williams-Sonoma,Inc.,aconsumer retail company,from 2000 to 2012,including Chief Operating and Chief Financial Officer from 2006 to 2012.Anuj Dhanda has served as our Executive Vice President and Chief Technology&Transformation Officer since 2023 and as our Executive VicePresident and Chief Information Officer since joining the Company in December 2015.Prior to joining the Company,Mr.Dhanda served asSenior Vice President of Digital Commerce of the Giant Eagle supermarket chain from March to December 2015,and as its Chief InformationOfficer from September 2013.12Table of ContentsPrior to Giant Eagle,from March 2008 to August 2013,Mr.Dhanda served as Chief Information Officer of PNC Financial Services,a bankholding company and financial services corporation.Omer Gajial has served as our Executive Vice President and Chief Merchandising&Digital Officer since April 2024,as our Executive VicePresident of Health and Chief Digital Officer since August 2022,as our Executive Vice President of Pharmacy and Health since February 2022and as our Senior Vice President,Rx Health and Wellness since September 2020.Prior to joining the Company,from January 2016 until August2020,Mr.Gajial was the General Manager for Amazon Marketplace business,an e-commerce platform owned and operated by Amazon,acrossHardlines,Softlines,and Consumables categories for the U.S.,Canada,and Mexico.At Amazon Mr.Gajial led sales,business development,product,program,and fulfillment teams to launch strategic sellers into North America.Prior to Amazon,from July 2000 until December 2015,Mr.Gajial held several positions of increasing responsibility at PepsiCo in Dubai and New York,before being named VP Global Strategy,Category Management&Insights for PepsiCos Walmart Customer team.Thomas Moriarty has served as our Executive Vice President,General Counsel and Chief Policy Officer since June 2023.Prior to joining theCompany,Mr.Moriarty served as EVP,Chief Policy and External Affairs Officer and General Counsel at CVS Health.Mr.Moriarty spenttwelve years at Medco Health Solutions,serving in various leadership roles in corporate strategy,legal affairs,global supply chain management,and mergers and acquisitions.Susan Morris has served as our Executive Vice President and Chief Operations Officer since January 2018.Ms.Morris has served in variousexecutive positions at the Company since 2010 including serving as our Executive Vice President,Retail Operations,West Region from April2017 to January 2018 and Executive Vice President,Retail Operations,East Region from April 2016 to April 2017.Prior to joining theCompany,Ms.Morris served as Senior Vice President of Sales and Merchandising and Vice President of Customer Satisfaction at SuperValu.Robert Backus has served as our Executive Vice President of Retail Operations,East Region since April 2024.Mr.Backus previously served asShaws Division President from 2020 and as Senior Vice President of Operations from 2016.Mr.Backus also served in various roles andpositions of increasing responsibility at Safeway prior to its merger with the Company dating back to October 1990.Michelle Larson has served as our Executive Vice President of Retail Operations,West Region since April 2024.Ms.Larson previously servedas our Executive Vice President of Retail Operations,East Region since March 2023 and as our Southwest and Shaws Division President since2018.Ms.Larson joined the Company in 2016 as Senior Vice President of Merchandising,Southwest.Evan Rainwater has served as our Executive Vice President,Supply Chain,Manufacturing and Strategic Sourcing since March 2020 and ourSenior Vice President,Supply Manufacturing since May 2019.Mr.Rainwater joined the Company in May 2005 as Vice President,Manufacturing.Jennifer Saenz has served as our Executive Vice President,Pharmacy&eCommerce since April 2024 and our Chief Merchandising Officer sinceJuly 2021.Prior to joining the Company,since 2006,Ms.Saenz served in several executive positions at PepsiCo.From October 2019 until July2021,Ms.Saenz served as Global Chief Marketing Officer for PepsiCo,and President,Global Foods,responsible for overseeing the marketingfunction across foods and beverages and growing the PepsiCo Foods portfolio across all global markets.From January 2016 to October 2019Ms.Saenz served as Senior Vice President&Chief Marketing Officer of PepsiCo Foods North America where she managed the business unitssnacking portfolio.Michael Theilmann has served as our Executive Vice President and Chief Human Resources Officer since August 2019.Prior to joining theCompany,Mr.Theilmann served as Global Practice Managing Partner,Human Resources13Table of ContentsOfficers Practice,from February 2018 to August 2019,and as Partner,Consumer Markets Practice,from June 2017 to January 2018,of Heidrick&Struggles International Incorporated,a worldwide executive search firm.Item 1A-Risk FactorsThere are risks and uncertainties that can affect our business.The most significant risk factors are discussed below.The following informationshould be read together with Part IIItem 7.Managements Discussion and Analysis of Financial Condition and Results of Operations of thisForm 10-K,which includes forward-looking statements and factors that could cause us not to realize our goals or meet our expectations.Risks Related to Our Business and OperationsGeneral economic conditions affecting the food and drug retail industry and various operating factors may affect our business and mayadversely affect our business and operating results.Our operations and financial performance are affected by economic conditions such as macroeconomic factors,credit market conditions and thelevel of consumer confidence.Both inflation and deflation affect our business.Food deflation could reduce sales growth and earnings,whilefood inflation could reduce gross margin rates and consumer spending.We have observed increased inflation during the past year with varyingimpacts on our business.We are unable to predict the direction of the economy or if inflation will increase materially or revert to deflation.Thecontinued increase in energy costs,including fuel,could also have an effect on consumer spending and on our costs of producing and procuringproducts that we sell.If the economy weakens,energy costs continue to increase or inflationary trends continue,our business and operatingresults could be adversely affected.We may also experience materially adverse impacts to our business as a result of consumers perceptions ofthe economy,and a decrease in their personal financial condition could hurt overall consumer confidence and reduce demand for many of ourproduct offerings.Consumers may reduce spending on non-essential items,purchase value-oriented products or increasingly rely on fooddiscounters in an effort to secure the food and drug products that they need,all of which could impact our sales and profit.Governmental andregulatory changes and reductions in governmental subsidies such as SNAP could also materially impact our business adversely.We compete within our industry not only for customers,but also for associates.Since the beginning of the COVID-19 pandemic,we have faceda competitive labor market due to labor shortages and turnover.Our inability to invest in,manage costs and keep pace with technologicalchanges,including those adopted by our competitors,may adversely impact our business initiatives and affect our financial performance.Wemay be limited in our ability to implement automation-related technological changes in certain of our operations if we are unable to negotiateappropriate terms in our contracts with our labor unions.Our success is also dependent in large part upon our ability to maintain and enhance thegoodwill and reputation of our banners,our customers connection to our banners,and a positive relationship with the communities in which weserve.Additionally,acts of violence at,or threatened against,our stores,including active shooter situations,may,in addition to other operationalimpact,result in damage and restricted access to our stores and/or store closures for short or extended periods of time,all of which couldmaterially adversely affect our financial performance.Our operations are dependent upon the availability of a significant amount of energy and fuel to manufacture,store,transport and sellproducts.Our operations are dependent upon the availability of a significant amount of energy and fuel to manufacture,store,transport and sell products.Energy and fuel costs are influenced by domestic and international political and economic circumstances and have experienced volatility bothrecently and over time.While we have entered into contracts to reduce the impact of volatile energy and fuel costs for our future energy needs,volatility that exceeds offsetting contractual arrangements could adversely affect our results of operations.14Table of ContentsFailure to realize anticipated benefits from our productivity initiatives could adversely affect our financial performance and competitiveposition.While we have identified and are implementing a broad range of specific productivity initiatives to help offset cost inflation,increase growth andimprove earnings,the savings from these productivity initiatives represent managements estimates and remain subject to risks and uncertainties.There can be no assurance that all of our initiatives will be successful or that we will realize the estimated benefits in the currently anticipatedamounts or timeframe,if at all.Also,certain of our initiatives may involve significant changes to our operating processes and systems that couldresult in disruptions in our operations and impact our results of operations.We may be adversely impacted by environmental,social and governance matters,including inability to meet goals and commitments that weestablish in relation to such matters.In recent years,there has been an increased focus from investors,governmental and nongovernmental entities,and the public on environmental,social and governance(ESG)matters,including greenhouse gas emissions,renewable energy,packaging and waste,practices related tosustainable supply chain,energy and water use,diversity,equity and inclusion,human rights,animal rights and social commitment.A variety oforganizations evaluate,and measure the performance of,companies on such ESG matters,and the results of these assessments can be widelypublicized.Given our commitment to ESG,we have established and publicly announced certain goals,commitments,and targets which we maychange in the future.Execution of our ESG strategies to achieve these goals,commitments,and targets are subject to risks and uncertainties,many of which may be outside of our control and prove to be more costly than we anticipated.These risks and uncertainties include,but are notlimited to,our ability to achieve our goals,commitments,and targets within the currently projected costs and the expected timeframes;unforeseen operational and technological difficulties;changes in investment assessments or increases in projected investments and our ability toinvest accordingly;changes in frameworks we have agreed to;actions by our competitors in setting or achieving similar goals;the outcome ofresearch efforts and future technology developments;and the success of our collaborations with third parties.Any failure,or perceived failure,toachieve our ESG goals,commitments,and targets,or perceived lack of intensity of our commitment to ESG initiatives or to otherwise meetevolving and varied stakeholder expectations could damage our reputation and customer,investor and other stakeholder relationships,and mayeven result in regulatory enforcement action.Such conditions could have an adverse effect on our business,results of operations and financialcondition.Risks Related to the MergerThe Merger Agreement and the pendency of the Merger could have a material adverse effect on our business,results of operations,financialcondition and stock price.On October 13,2022 the Company,The Kroger Co.(Kroger or Parent)and Kettle Merger Sub,Inc.,a wholly owned subsidiary of Parent(Merger Sub),entered into an Agreement and Plan of Merger(the Merger Agreement),pursuant to which Merger Sub will be merged withand into the Company(the Merger),with the Company surviving the Merger as the surviving corporation and a direct,wholly ownedsubsidiary of Parent.The Merger Agreement is subject to the satisfaction of various covenants and agreements,including,among others theexpiration or termination of the applicable waiting period(and any extension thereof)under the Hart-Scott-Rodino Antitrust Improvements Actof 1976,as amended(HSR Act)and certain other approvals and clearances.During the period between the date of signing of the Merger Agreement and the closing of the Merger(the Closing),our business is exposed tocertain inherent risks due to the effect of the announcement or pendency of the Merger and the transactions contemplated by the Merger,including the divestiture plan with C&S Wholesale Grocers,LLC,which may impact our business relationships,financial condition andoperating results.Some of these risk factors include:15Table of Contentsdifficulties maintaining relationships with customers,distributors,vendors,suppliers,service providers and other business partners,whomay defer decisions about working with us,move to our competitors,seek to delay or change existing business relationships with us;uncertainties caused by negative sentiment in the marketplace with respect to the Merger,which could adversely impact investorconfidence in the Company;distraction of our current employees as a result of the Merger which could result in a decline in their productivity or cause distractions inthe workplace;our inability to attract new employees or retain current employees may be exacerbated due to uncertainties related to the Merger;diversion of significant management time and resources towards the completion of the Merger and transactions related to the Merger;impact of costs related to completion of the Merger and transactions related to the Merger,including any costs related to any divestituresfor which we are required to obtain regulatory approvals;our inability to solicit other acquisition proposals,pursue alternative business opportunities,make strategic changes to our business andother restrictions on our ability to conduct our business pursuant to the Merger Agreement;andother developments beyond our control,including,but not limited to,changes in domestic or global economic conditions that may affectthe timing or success of the Merger.While the Merger Agreement is in effect,we are subject to restrictions on our business activities.While the Merger Agreement is in effect,we are generally required to conduct our business in the ordinary course consistent with past practices.However,we are restricted from taking certain actions without Krogers prior consent,which is not to be unreasonably withheld,conditioned ordelayed.These limitations include,among other things,certain restrictions on our ability to amend our organizational documents,acquire otherbusinesses and assets,dispose of our assets,make investments,repurchase,reclassify or issue securities,make loans,pay dividends,incurindebtedness,make capital expenditures,enter into,amend or terminate certain contracts,change accounting policies or procedures,initiate orsettle certain litigation,change tax classifications and elections,or take certain actions relating to intellectual property.These restrictions couldprevent us from pursuing strategic business opportunities and taking extraordinary actions with respect to our business during this period.Litigation related to the Merger could prevent or delay completion of the Merger or otherwise negatively affect our businesses andoperations.Putative stockholder complaints,including stockholder class action complaints,demands for books and records and other complaints or actionsmay be filed against us,our board of directors,Kroger,Krogers board of directors,and others in connection with the transactions contemplatedby the Merger Agreement.The outcome of litigation is uncertain,and we may not be successful in defending against any such future claims.Lawsuits that may be filed against us,our board of directors,Kroger,or Krogers board of directors could delay or prevent the Merger andotherwise adversely affect our business,results of operations,and financial condition.The ability to complete the Merger is subject to the receipt of consents and approvals from government entities,which may impose conditionsthat could cause us or Kroger to abandon the Merger.On February 26,2024,the United States Federal Trade Commission(FTC)issued an administrative complaint and authorized a lawsuit infederal court to enjoin the Merger.A group of nine states joined the FTC complaint and two states have filed suits in respective state courts toenjoin the Merger.Completion of the Merger is conditioned upon,among other things,the expiration or termination of the required waitingperiod(and any extension thereof)applicable to the Merger and any transactions contemplated by the Merger under the HSR Act,and resolutionwith16Table of Contentsthe FTC and the states who have filed or may file suit.We cannot provide any assurance that we or Kroger will prevail in court or obtain thenecessary approvals to complete the Merger.Failure to prevail in any legal challenge to the Merger may result in the delay or abandonment ofthe Merger.The Merger may not be completed within the expected timeframe,or at all,and significant delay or the failure to complete the Merger couldadversely affect our business.We cannot assure that our business,our relationships or our financial condition will not be adversely affected if the Merger is not consummatedwithin the expected timeframe,or at all.Failure to complete the Merger within the expected timeframe,or at all,could adversely affect ourbusiness and the market price of our common stock in several ways,including the following:to the extent that the current market price of our common stock reflects an assumption that the Merger will be completed,it may benegatively impacted because of a failure to complete the Merger within the expected timeframe or at all;investor and consumer confidence in our business could decline,litigation could be brought against us,relationships with vendors,service providers,investors and other business partners may be adversely impacted,and we may be unable to retain key personnel;we have incurred,and will continue to incur,significant costs,expenses and fees for professional services and other costs in connectionwith the Merger and the transactions contemplated by the Merger,for which we may receive little or no benefit if the Merger and thetransactions contemplated by the Merger are not completed.Many of these fees and costs will be payable by us even if the Merger andthe transactions contemplated by the Merger are not completed and may relate to activities that we would not have undertaken other thanto complete the Merger;andfailure to complete the Merger,may result in negative publicity and a negative impression of us in the investment community.The occurrence of any of these events individually or in combination could materially and adversely affect our business,results of operations,financial condition,and our stock price.Risks Related to Our IndustryCompetition in our industry is intense,and our failure to compete successfully may adversely affect our profitability and operating results.The food and drug retail industry is large and dynamic,characterized by intense competition among a collection of local,regional and nationalparticipants.In addition to new entrants to the market,we face strong competition from existing supercenters,other brick and mortar food and/ordrug retailers,club stores,dollar and discount stores,grocery outlets,online retailers and distributors,specialty and niche supermarkets,drugstores,general merchandisers,wholesale stores,convenience stores,natural food stores,farmers markets,local chains and stand-alone storesthat cater to the individual cultural preferences of specific neighborhoods,restaurants,catering companies and home delivery and meal solutioncompanies.Shifts in the competitive landscape,consumer preference or market share may have an adverse effect on our profitability and resultsof operations.As a result of consumers growing desire to shop online,we also face increasing competition from both our existing competitors that haveincorporated the internet as a direct-to-consumer channel and online providers that sell grocery products.Although we have accelerated theexpansion of our digital business to offer our customers the ability to shop online for both home delivery and Drive Up&Go curbside pickup,there is no assurance that these online initiatives will continue to be successful.In addition,these initiatives may have an adverse impact on ourprofitability because of lower gross margins or greater operating costs to compete.17Table of ContentsOur ability to attract customers is dependent,in large part,upon a combination of channel preference,location,store conditions,quality,price,service,convenience and selection and our ability to leverage existing and emerging digital technologies.In each of these areas,other companiescompete with us and may successfully attract our customers by matching or exceeding what we offer or by providing greater shoppingconvenience or better offerings.In recent years,many of our competitors have aggressively added locations and adopted a multi-channelapproach to marketing and advertising.Our responses to competitive pressures,such as additional promotions,increased advertising,additionalcapital investment including for development of our digital offerings and retail media network,could adversely affect our profitability and cashflow.We cannot guarantee that our competitive response will succeed in increasing or maintaining our share of retail food sales.An increasingly competitive industry and inflation and deflation in the prices of certain foods have made it difficult for food retailers to achievepositive identical sales growth on a consistent basis.We and our competitors have attempted to maintain or grow our respective share of retailfood sales through capital and price investment,increased promotional activity and new and remodeled stores,creating a more difficultenvironment to consistently increase year-over-year sales.Some of our primary competitors are larger than us,have greater financial resourcesavailable to them or sell a diversified mix of non-food products,and,therefore,may be able to devote greater resources to grow their share ofretail food sales or offset lower food margins with higher-margin non-food products.Price investment by our competitors has also adverselyaffected our operating margins.Our continued success to effectively compete in the food retail industry is dependent upon our ability to control operating expenses,replicatingcompetitor capabilities,making appropriate investments,managing product and labor costs in an increasingly competitive labor market andhealth care and pension costs stipulated by our collective bargaining agreements.Several of our primary competitors are larger than we are,orare not subject to collective bargaining agreements,allowing them to more effectively leverage their fixed costs or more easily reduce operatingexpenses.Changes in our product mix also may negatively affect our profitability.Our inability to adequately control and prevent shrink hasimpacted our results of operations and could impact our results of operations in the future.Failure to accomplish our objectives could impair ourability to compete successfully and adversely affect our profitability.Profit margins in the food retail industry are low.In order to increase ormaintain our profit margins,we develop operating strategies to increase revenues,increase gross margins and reduce costs,such as newmarketing programs,new advertising campaigns,productivity improvements,shrink-reduction initiatives,distribution center efficiencies,manufacturing efficiencies,energy efficiency programs and other similar strategies.Our failure to achieve forecasted revenue growth,grossmargin improvement or cost reductions could have a material adverse effect on our profitability and operating results.We may not timely identify or effectively respond to consumer trends,which could negatively affect our relationship with our customers,thedemand for our products and services and our market share.Because we face intense competition,our success depends,in part,on effectively anticipating evolving trends in demographics and responding tochanging consumer preferences and demands.It is difficult to predict consistently and successfully the products and services our customers willdemand over time.Failure to timely identify or effectively respond to changing consumer tastes,preferences and spending patterns could lead usto offer our customers a mix of products or a level of pricing that they do not find attractive.This could negatively affect our relationship withour customers,leading them to reduce their visits to our stores and the amount they spend.Further,while we have significantly expanded ourdigital capabilities and grown our loyalty programs over the last several years,as technology advances,and as the way our customers interactwith technology changes,we will need to continue to develop and offer digital,loyalty and media solutions that are both cost effective andcompelling to our customers.Our failure to anticipate or respond to customer expectations for products,services,digital and loyalty programswould adversely affect the demand for our products and services and our market share and could have an adverse effect on our financialperformance,margins,and operating income.18Table of ContentsConsolidation in the healthcare industry could adversely affect our business and financial condition.Many organizations in the healthcare industry have consolidated to create larger healthcare enterprises with greater market power,which hasresulted in increased pricing pressures.If this consolidation trend continues,it could give the resulting enterprises even greater bargaining power,which may lead to further pressure on the prices for our pharmacy products and services.If these pressures result in reductions in our prices,wewill become less profitable unless we are able to achieve corresponding reductions in costs or develop profitable new revenue streams.Weexpect that market demand,government regulation,third-party reimbursement policies,government contracting requirements,litigation andsocietal pressures will continue to cause the healthcare industry to evolve,potentially resulting in further business consolidations and alliancesamong the industry participants we engage with,which may adversely impact our business,financial condition and results of operations.Certain risks are inherent in providing pharmacy products and services,and our insurance may not be adequate to cover any claims againstus.We currently operate 1,725 pharmacies.As a result,we are exposed to risks inherent in the packaging,dispensing,billing,display,distributionand disposal of pharmaceuticals and other healthcare products,including risks of liability for products such as opioids.Although we maintaininsurance against such liabilities,we cannot guarantee that the coverage limits under our insurance programs will be adequate to protect usagainst future claims,or that we will be able to maintain this insurance on acceptable terms in the future,or at all for healthcare andpharmaceutical liabilities.Our results of operations,financial condition or cash flows may be materially adversely affected if in the future ourinsurance coverage proves to be inadequate or unavailable,or there is an increase in the liability for which we self-insure,or we suffer harm toour reputation because of an error or omission.Also,our business operations and operating results could be materially adversely impacted bylegislative,enforcement,regulatory,judicial and public policy changes.We are subject to numerous federal and state regulations.Each of our in-store pharmacies are enrolled in government healthcare programs andmust be licensed by the respective state government.The licensing and enrollment requirements vary from state to state.An additionalregistration certificate must be granted by the U.S.Drug Enforcement Administration,and,in some states,a separate controlled substance licensemust be obtained to dispense controlled substances.In addition,pharmacies selling controlled substances are required to maintain extensiverecords and often report information to state and federal agencies.If we fail to comply with existing or future laws and regulations,we couldsuffer substantial civil or criminal penalties,including the loss of our licenses to operate pharmacies and our ability to participate in federal andstate healthcare programs.Because of the severe penalties we could face,we must devote significant operational and managerial resources tocomplying with these laws and regulations.Application of federal and state laws and regulations could subject our current practices to allegations of impropriety or illegality,or couldrequire us to make significant changes to our operations.In addition,we cannot predict the impact of future legislation and regulatory changeson our pharmacy operations or assure that we will be able to obtain or maintain the regulatory approvals required to operate our business.Risks Related to Our Supply ChainProduct and raw material supply disruptions,especially those related to fresh products,may have an adverse effect on our profitability andoperating results.Reflecting consumer preferences,we have a significant focus on fresh products.We rely on various suppliers and vendors to provide and deliverour fresh and other product inventory on a continuous basis and to supply the raw materials to manufacture certain of our Own Brands products.We could suffer significant fresh and other product inventory losses and significant lost revenue in the event of the loss or a shutdown of a majorsupplier or vendor,19Table of Contentsdisruption of our distribution network,extended power outages,natural disasters,foreign conflicts or other catastrophic or unexpectedoccurrences such as a pandemic like COVID-19.We expect our suppliers to comply with applicable laws,including labor,safety andenvironmental laws.Our ability to find qualified suppliers who uphold our standards and requirements for products,including fresh,and toaccess such products in a timely and operationally efficient manner in volumes we may demand may become a significant challengeSevere weather,natural disasters and other climate changes may adversely affect our business.Severe weather conditions such as hurricanes,earthquakes,floods,wildfires,mudslides,winter storms,tornadoes,as well as other naturaldisasters in areas in which we have stores or distribution centers have caused and may cause physical damage to our properties,closure of one ormore of our stores,manufacturing facilities or distribution centers,lack of an adequate work force,disruption in the manufacture and supply ofproducts,disruption and delays in transportation and delivery of goods,reduction in customer traffic and generally a reduction in the availabilityof products in our stores.In addition,adverse climate conditions,weather patterns and their respective impacts such as drought,flood,wildfires,mudslides and risingambient temperatures adversely impact product cultivation conditions for farmers,ranchers and fishermen,including by disrupting ecosystemsand severely altering the growing conditions,nutrient levels,soil moisture,and water availability necessary for the growth and cultivation ofcrops and raising of animals.As extreme shifts in climate conditions make it more difficult to raise and produce crops,livestock,and seafood,there may be a decrease in the product quality and the yield quantity of food products.Consequently,such a decreased food supply mayadversely affect the availability or cost of certain products within the grocery supply chain,which could lead to shortages or reduced gross profitmargins as such products become more expensive.At the global level,the impact of climate change on food supply is more likely to lead to foodinsecurity in countries which,unlike the United States,have climates insufficient to sustain diverse food production.Thus,there may beincreased demand for agricultural exports from regions that experience production difficulties yet have sufficient wealth to purchase imports.This may impact the availability of products for us to purchase.In addition,legislative and regulatory efforts to combat climate change or other environmental issues could result in new or more stringent formsof oversight and mandatory or voluntary reporting,diligence and disclosure,which could increase costs,result in additional taxes and otherexpenses,and further impact our business,results of operations and financial condition.Threats or potential threats to food and drug safety,the occurrence of a widespread health epidemic and/or pandemic or regulatory concernsin our supply chain may adversely affect our business.Acts or threats,whether perceived or real,of war or terror or other criminal activity directed at the food and drug industry or the transportationindustry,whether or not directly involving our stores,could increase our operating costs or impact general consumer behavior and consumerspending.Other events that give rise to actual or potential food contamination,drug contamination or food-borne illnesses,or a widespreadregional,national or global health epidemic and/or pandemic could have an adverse effect on our operating results or disrupt production anddelivery of the products we sell,our ability to appropriately and safely staff our stores and cause customers to avoid public gathering places orotherwise change their shopping behaviors.We source our products from vendors and suppliers and related networks across the globe who may be subject to regulatory actions or facecriticism due to actual or perceived social injustices,including human trafficking,non-sustainable practices,child labor or environmental,healthand safety violations.A disruption in our supply chain due to any regulatory action or social injustice could have an adverse impact on oursupply chain and ultimately our business,including potential harm to our reputation.20Table of ContentsWe could be affected if consumers lose confidence in the food supply chain or the quality and safety of our products.We could be adversely affected if consumers lose confidence in the safety and quality of certain food products.Adverse publicity about thesetypes of concerns,whether valid or not,may discourage consumers from buying our products or cause production and delivery disruptions.Tothe extent that a pathogen is food-borne,or perceived to be food-borne,future outbreaks may adversely affect the price and availability of certainfood products and cause our customers to eat less of such products.In addition,recalls or withdrawals of food products,and in particular thefood products we manufacture or are sold under any of our Own Brands product names,may involve costs to us or reputational harm to us.Thereal or perceived sale of contaminated food products by us could result in product liability claims,a loss of consumer confidence and productrecalls,which could have a material adverse effect on our business.Fuel prices and availability may adversely affect our results of operations.We currently operate 402 fuel centers that are adjacent to many of our store locations.As a result,we sell a significant amount of gasoline anddiesel fuel.Increased regulation or significant increases in wholesale fuel costs could result in lower gross margins on fuel sales,and demandcould be negatively impacted by retail price increases as well as by concerns about the effect of emissions on the environment.We are unable topredict future regulations,environmental effects,political unrest,geopolitical tensions,hostilities or boycotts,acts of terrorism,the actions ofmajor oil producing countries to regulate oil production and other matters that may affect the cost and availability of fuel,and how our customerswill react to any of the preceding matters,which could adversely affect our results of operations.Increased commodity prices may adversely impact our profitability.Many of our own and sourced products include ingredients such as wheat,corn,oils,milk,sugar,proteins,cocoa and other commodities.Commodity prices can be volatile and can be impacted by global conflicts such as the impact on wheat and corn prices by the armed conflictbetween Russia and Ukraine.Any increase in commodity prices may cause an increase in our input costs or the prices our vendors seek from us.Although we typically are able to pass on modest commodity price increases or mitigate vendor efforts to increase our costs,we may be unableto continue to do so,either in whole or in part,if commodity prices increase materially or there are significant inflationary pressures.If we areforced to increase prices,our customers may reduce their purchases at our stores or trade down to less profitable products.Both may adverselyimpact our profitability as a result of reduced revenue or reduced margins.Risks Related to Our WorkforceA significant majority of our employees are unionized,and our relationship with unions,including labor disputes or work stoppages,couldhave an adverse impact on our operations and financial results.As of February 24,2024,approximately 200,000 of our employees were covered by collective bargaining agreements.During fiscal 2023,collective bargaining agreements covering approximately 32,500 employees expired and were successfully renegotiated.In fiscal 2024 collectivebargaining agreements covering approximately 28,500 employees are scheduled to expire.In future negotiations with labor unions,we expectthat health care,pension costs and/or contributions and wage costs,among other issues,will be important topics for negotiation.If,upon theexpiration of such collective bargaining agreements,we are unable to negotiate acceptable contracts with labor unions,it could result in strikesby the affected workers and thereby significantly disrupt our operations.As21Table of Contentspart of our collective bargaining agreements,we may need to fund additional pension contributions,which would negatively impact ouroperating costs.Increased pension expenses,contributions and surcharges may have an adverse impact on our financial results.We currently contribute to 27 multiemployer pension plans for a substantial majority of employees represented by unions pursuant to collectivebargaining agreements that require us to contribute to these plans.Under the Employee Retirement Income Security Act of 1974,as amended(ERISA),the Pension Benefit Guaranty Corporation(the PBGC)has the authority to petition a court to terminate an underfunded pensionplan in limited circumstances.In the event that our defined benefit pension plans are terminated for any reason,we could be liable for the entireamount of the underfunding,as calculated by the PBGC based on its own assumptions(which would result in a larger obligation than that basedon the actuarial assumptions used to fund such plans).Under ERISA and the Internal Revenue Code,as amended(the Code),the liability underthese defined benefit plans is joint and several with all members of our control group,such that each member of our control group is potentiallyliable for the defined benefit plans of each other member of the control group.Based on an assessment of the most recent information available,we believe that most of the multiemployer plans to which we contribute areunderfunded,which is the amount by which the actuarial determined plan liabilities exceed the value of the plan assets.We are only one of anumber of employers contributing to these plans and the underfunding of any of these plans to which we contribute are not our liability.Thoughwe are not obligated nor the guarantor for any of the underfunding of multiemployer plans to which we contribute,as of December 31,2023,weattempted to estimate our allocable share of the underfunding of multiemployer plans to which we contribute,based on the ratio of ourcontributions to the total of all contributions to these plans in a year.Our estimate of the Companys allocable share of the underfunding ofmultiemployer plans to which we contribute was$4.5 billion.Our estimate is based on the most current information available to us includingactuarial evaluations and other data(that includes the estimates of others),and such information may be outdated or otherwise unreliable.Ourestimate could also change based on the amount contributed to the plans,investment returns on the assets held in the plans,actions taken bytrustees who manage the plans benefit payments,interest rates,the amount of withdrawal liability payments made to the plans,if the employerscurrently contributing to these plans cease participation,and requirements under the Pension Protection Act of 2006,the Multiemployer PensionReform Act of 2014 and applicable provisions of the Code.The American Rescue Plan Act(ARP Act)establishes a special financial assistance program for financially troubled multiemployer pensionplans.Under the ARP Act,eligible multiemployer plans can apply to receive a one-time cash payment in the amount needed to pay pensionbenefits through the plan year ending 2051.We participate in 16 multiemployer plans that may be eligible for the special financial assistance.In the event we were to exit certain markets or otherwise cease contributing to multiemployer plans,we could trigger a substantial withdrawalliability.Such withdrawal liability may have a material adverse impact on our financial results.We are also the sponsors of defined benefit retirement plans for certain employees.The funded status of these plans is a significant factor indetermining annual pension expense and cash contributions to fund the plans.Unfavorable investment performance,increased pension expenseand cash contributions may have an adverse impact on our financial results.The minimum wage continues to increase and is subject to factors outside of our control.Changes to wage regulations could have an impacton our future results of operations.A considerable number of our employees are paid at rates related to the federal minimum wage.Additionally,many of our stores are located instates,including California,where the minimum wage is greater than the federal22Table of Contentsminimum wage and where a considerable number of employees receive compensation equal to the states minimum wage which are also slatedto increase over the next few years.As examples,in California and New Jersey,where we employed 70,000 and 8,000 associates,respectively,asof February 24,2024,the current minimum wage was increased to$16.00 per hour and$15.13 per hour,respectively,effective January 1,2024.Moreover,municipalities may set minimum wages above the applicable state standards.Increases in the federal minimum wage or the enactmentof additional state or local minimum wage increases could increase our labor costs,which may adversely affect our results of operations andfinancial condition.The food retail industry is labor intensive.Our ability to meet our labor needs,while controlling wage and labor-related costs,is subject tonumerous external factors,including the availability of qualified persons in the workforce in the local markets in which we are located,unemployment levels within those markets,prevailing wage rates,changing demographics,attitudes toward employment in the food and drugretail industry,the perception of our corporate values and business strategy,health and other insurance costs,the impact of the Merger andchanges in employment and labor laws.Such laws related to employee hours,wages,job classification and benefits could significantly increaseour operating costs.In the event of increasing wage rates,if we fail to increase our wages competitively,the quality of our workforce coulddecline,causing our customer service to suffer,while increasing wages for our employees could cause our gross margins to decrease.If we areunable to hire and retain employees capable of meeting our business needs and expectations,our business and brand image may be impaired.Any failure to meet our staffing needs or any material increase in turnover rates of our employees may adversely affect our business,results ofoperations and financial condition.Failure to attract and retain qualified associates could materially adversely affect our financial performance and our ability to successfullyexecute our business strategy.Our ability to continue to conduct and expand our operations depends on our ability to attract and retain a large and growing number of qualifiedassociates.Our ability to meet our labor needs,including our ability to find qualified personnel to fill positions that become vacant at ourexisting stores and distribution centers,while controlling our associate wage and related labor costs,is generally subject to numerous externalfactors,including the availability of a sufficient number of qualified persons in the work force of the markets in which we operate,unemployment levels within those markets,prevailing wage rates,changing demographics,attitudes toward employment in the food and drugretail industry,the perception of our corporate values and business strategy,health and other insurance costs,the impact of the Merger andadoption of new or revised employment and labor laws and regulations.If we are unable to locate,to attract or to retain qualified personnel,thequality of service we provide to our customers may decrease and our financial performance may be adversely affected.The continued successful implementation of our business strategy depends in large part upon the ability and experience of members of our seniormanagement.In addition,our financial performance is dependent on our ability to identify,hire,train,motivate and retain qualified management,technical,sales and marketing and retail personnel.If we lose the services of members of our senior management or are unable to continue toattract and retain the necessary personnel,we may not be able to successfully execute our business strategy,which could have an adverse effecton our business.Legal and Regulatory RisksUnfavorable changes in government regulation may have a material adverse effect on our business.We operate our business within strict and complex regulatory environments and could be materially adversely affected by changes to,and/or anyfailure to comply with,existing and new legal requirements.In addition,our industry faces significant political,societal,and media scrutiny,andwe may be subject to frequent or increasing challenges which may impact our reputation and business.Additionally,shifts in enforcementpractices or regulatory scrutiny generally cannot be anticipated or predicted or our predictions may not be accurate.If we fail to23Table of Contentspredict or respond adequately to regulatory changes or expanding disclosure requirements,or do not respond as effectively as our competitors,our reputation,business,operations,and financial performance may be adversely affected.Political,governmental,and regulatory regimes andpractices can quickly change as a result of elections or other events over which we have little to no control.Such changes,including those whichmay occur due to elections held in 2024,are unpredictable and may have negative impacts on our business and operations.Compliance withlaws,regulations,policies,and enforcement practices may become challenging requiring operational changes which may be difficult toimplement,increase our operating costs,require significant capital expenditures,or result in adverse publicity and harm our reputation.Tax matters could adversely affect our results of operations and financial conditions.We may be affected by higher rates of federal,state,or local tax imposed as a result of political developments or economic conditions,whichcould affect our effective tax rate.Our effective tax rate and future tax liability could be adversely affected by regulatory and legal changes,theresults of tax audits and examinations,and changes in accounting principles and interpretations relating to tax matters,all of which couldnegatively impact our business.In addition,changes in tax rates,tax laws,and regulations that impact our customers or the economy generallymay also impact our financial condition and results of operations.Unfavorable changes in,failure to comply with or increased costs to comply with environmental laws and regulations could adversely affectus.The storage and sale of petroleum products could expose us to potentially significant liabilities.Our operations,including our 402 fuel centers,are subject to various laws and regulations relating to the protection of the environment,including those governing the storage,management,disposal and cleanup of hazardous materials.Some environmental laws,such as theComprehensive Environmental Response,Compensation and Liability Act and similar state statutes,impose strict,and under certaincircumstances joint and several,liability for costs to remediate a contaminated site,and also impose liability for damages to natural resources.Third-party claims in connection with releases of,or exposure to,hazardous materials relating to our current or former properties or third-partywaste disposal sites can also arise.In addition,the presence of contamination at any of our properties could impair our ability to sell or lease thecontaminated properties or to borrow money using any of these properties as collateral.The costs and liabilities associated with any suchcontamination could be substantial and could have a material adverse effect on our business.Under current environmental laws,we may be heldresponsible for the remediation of environmental conditions regardless of whether we lease,sublease or own the stores or other facilities andregardless of whether such environmental conditions were created by us or a prior owner or tenant.In addition,the increased focus on climatechange,waste management and other environmental issues may result in new environmental laws or regulations that negatively affect us directlyor indirectly through increased costs on our suppliers.There can be no assurance that environmental contamination relating to prior,existing orfuture sites or other environmental changes will not adversely affect us through,for example,business interruption,cost of remediation oradverse publicity.We are subject to,and may in the future be subject to,legal or other proceedings that could have a material adverse effect on us.In the course of conducting our business,arising in or outside of the ordinary course,we are and may become a party to various legalproceedings,including class actions in matters involving personnel and employment issues,federal and state wage and hour laws,personalinjury,antitrust claims based on both federal and state law,packaging or product claims,claims related to the sale of drug or pharmacy products,such as opioids,claims invoking consumer-protection statutes,intellectual property claims and fiduciary and securities claims.We may alsobecome subject to governmental and regulatory inquiries related to our operations.We estimate our exposure to legal proceedings and establishreserves for the estimated liabilities.We are unable to predict the outcome of any24Table of Contentslitigation,investigation or any action by governmental entities and can provide no assurance as to the scope and outcome of these matters andwhether our business,financial position,results of operations or cash flows will not be materially adversely affected.We use a combination of insurance and self-insurance to address potential liabilities for workers compensation,automobile and generalliability,property risk(including earthquake and flood coverage),director and officers liability,employment practices liability,pharmacyliability,employee health care benefits and cyber and terrorism risks.We estimate the liabilities associated with the risks retained by us,in part,by considering historical claims experience,demographic and severityfactors and other actuarial assumptions which,by their nature,are subject to a high degree of variability.Among the causes of this variability areunpredictable external factors affecting future inflation rates,discount rates,litigation trends,legal interpretations,benefit level changes andclaim settlement patterns.The majority of our workers compensation liability is from claims occurring in California,where workerscompensation has received intense scrutiny from the states politicians,insurers,employers and providers,as well as the public in general.Ifother states adopt workers compensation programs similar to Californias,then our workers compensation liability may increase which couldhave a material adverse impact on our results of operations.Risks Related to Information Security,Cybersecurity,Data Privacy and Evolving TechnologiesWe may be adversely affected by risks related to our dependence on IT systems.Any future changes to or intrusion into these IT systems,even if we are compliant with industry security standards,could materially adversely affect our financial condition and operating results.We have complex information technology systems that are important to the success of our business operations,financial reporting and marketinginitiatives.Our information systems are subject to outages,unplanned downtime,program transitions,breakdowns,ransomware attacks,viruses,malicious programs and other cyber incidents.If we fail to timely or successfully mitigate such adverse events affecting these systems,orexperience difficulties accessing the proprietary business data stored in these systems,or in maintaining,expanding or upgrading existingsystems or implementing new systems,we could incur significant losses to our business and operations.These risks may be further exacerbatedby the deployment and use of cloud-based enterprise solutions.In a cloud computing environment,we could be subject to outages by third-partyservice providers and security breaches to their systems,which we may have little control over.In the case of a cloud computing outage,thereconstitution of our business services running on those computing resources will be dependent on the third-party hosting provider restoringavailability.Improper activities by third parties,exploitation of encryption technology,new data-hacking tools and discoveries and other events ordevelopments may result in future intrusions into or compromise of our networks,payment card terminals or other payment systems.We regularly defend against and respond to data security incidents.While we are vigilant in monitoring the security of our informationtechnology systems,we may not be able to prevent all unauthorized access or remediate the impact of such unauthorized access.The techniquesused by cyber criminals change frequently and often cannot be recognized until launched against a target;accordingly,we may not be able toanticipate these frequently changing techniques,implement adequate preventive measures for all of them or remediate any unauthorized accesson a timely basis.In addition,ongoing geopolitical conflicts may increase the risk of cyberattacks which could impact our operations.Anyunauthorized access into our customers sensitive information,data belonging to us or our vendors or employee data,even if we are compliantwith industry security standards,could put us at a competitive disadvantage,result in deterioration of our customers,vendors and employeesconfidence in us and subject us to25Table of Contentsinvestigations,required notifications,potential litigation,liability,fines and penalties and consent decrees,resulting in a possible materialadverse impact on our financial condition and results of operations.As a merchant that accepts debit and credit cards for payment,we are subject to the Payment Card Industry(PCI)Data Security Standard(PCI DSS),issued by the PCI Council.PCI DSS contains compliance guidelines and standards with regard to security surrounding the physicaladministrative and technical storage,processing and transmission of individual cardholder data.By accepting debit cards for payment,we arealso subject to compliance with American National Standards Institute(ANSI)data encryption standards and payment network securityoperating guidelines.Failure to be PCI compliant or to meet other payment card standards may result in the imposition of financial penalties orthe allocation by the card brands of the costs of fraudulent charges to us.As well,the Fair and Accurate Credit Transactions Act(FACTA)requires systems that print payment card receipts to employ personal account number truncation so that the consumers full account number isnot viewable on the slip.Despite our efforts to comply with these or other payment card standards and other information security measures,wecannot be certain that all of our IT systems will be able to prevent,contain or detect all cyber-attacks or intrusions.To the extent that anydisruption results in the loss,damage or misappropriation of information,we may be adversely affected by claims from customers,financialinstitutions,regulatory authorities,payment card associations and others.In addition,privacy and information security laws and standardscontinue to evolve and could expose us to further regulatory burdens.The cost of complying with stricter laws and standards,including PCIDSS,ANSI and FACTA data encryption standards and the California Privacy Rights Act and other state laws,could be significant.The loss of confidence from a data security incident involving our customers,employees or vendors could materially adversely affect ourfinancial condition and operating results.We receive and store personal information in connection with our business including from processing credit card data,digital marketing,andhuman resources records.The protection of our customer,employee and vendor data is critically important to us.Despite our considerable effortsto secure,upgrade and maintain our computer networks,our information security could be compromised,and customer,employee and vendorconfidential information could be misappropriated whether as a result of cyberattacks on our information systems,the information systemshosted by third party providers or otherwise.If we experience a data security incident,we could be exposed to government enforcement actions,ransomware claims,loss of business information,negative publicity and possible claims from customers,associates,financial institutions andpayment card associations.In addition,our customers could lose confidence in our ability to protect their personal information,which couldcause them to stop shopping at our stores altogether and materially adversely affect our financial condition and operating results.We and our third parties may use artificial intelligence in our business,which could result in competitive and reputational harm,and legalliability,and adversely affect our results of operations.We and our third parties are increasingly incorporating artificial intelligence(AI)solutions into our operations,systems,and services.Ourcompetitors may incorporate AI into their products more quickly or more successfully than us,which could impair our ability to competeeffectively in the market.Additionally,if the content,analyses,or recommendations that AI applications assist in producing are or are alleged tobe deficient,inaccurate,or biased,our business,financial condition,and results of operations may be adversely affected.AI presents emerging ethical issues and potential harms to our customers,patients,and associates and if our use of AI becomes controversial,wemay experience competitive harm,brand or reputational harm,or legal liability.The rapid evolution of AI,including expected governmentregulation of AI and automated decision making,requires resources,formalized AI governance,a commitment to the ethical and responsible useof data,and processes to best meet these challenges.If we fail to adopt AI in a thoughtful and strategic manner,the risks above may beexacerbated.26Table of ContentsRisks Related to Our IndebtednessOur indebtedness could adversely affect our financial condition and prevent us from fulfilling our obligations under our indebtedness.As of February 24,2024,we had approximately$7.7 billion of debt outstanding(other than finance lease obligations),and,subject to ourborrowing base,we would have been able to borrow an additional$3.8 billion under our asset-based loan(ABL)facility(the ABL Facility).As of February 24,2024,we and our subsidiaries had approximately$0.5 billion of finance lease obligations.Our indebtedness could have important consequences.For example,it could:increase our vulnerability to general adverse economic and industry conditions;require us to dedicate a substantial portion of our cash flow from operations to payments on our indebtedness,thereby reducing theavailability of our cash flow to fund working capital,capital expenditures and other general corporate purposes,including acquisitions;limit our flexibility in planning for,or reacting to,changes in our business and the industry in which we operate;place us at a competitive disadvantage compared to our competitors that have less debt;andlimit our ability to borrow additional funds.In addition,there can be no assurance that we will be able to refinance any of our debt or that we will be able to refinance on commerciallyreasonable terms.If we were unable to make payments or refinance our debt or obtain new financing under these circumstances,we would haveto consider other options,such as:sales of assets;sales of equity;orrestructure of the applicable debt.We may incur substantially more debt in the future.We and our subsidiaries may incur substantial additional indebtedness in the future.The terms of the credit agreement that governs the ABLFacility and the indentures that govern our indebtedness,as disclosed in Part IIItem 8.Financial Statements and Supplementary DataNote12,permit us to incur significant additional debt,subject to certain limitations.If new indebtedness is added to our and our subsidiaries currentdebt levels,the related risks that we and they now face would increase.To service our indebtedness,we require a significant amount of cash,and our ability to generate cash depends on many factors beyond ourcontrol.Our ability to make cash payments on and to refinance the indebtedness and to fund planned capital expenditures will depend on our ability togenerate significant operating cash flow in the future,as described in the section entitled Part IIItem 7.Managements Discussion andAnalysis of Financial Condition and Results of Operations of this Annual Report on Form 10-K.This ability is,to a significant extent,subject togeneral economic,financial,competitive,legislative,regulatory and other factors that are beyond our control.Our business may not generate sufficient cash flow from operations to enable us to pay our indebtedness or to fund our other liquidity needs.Inany such circumstance,we may need to refinance all or a portion of our indebtedness,on or before maturity.We may not be able to refinance anyindebtedness on commercially reasonable terms,or at all.If we cannot service our indebtedness,we may have to take actions such as sellingassets,seeking additional27Table of Contentsequity or reducing or delaying capital expenditures,strategic acquisitions and investments.Any such action,if necessary,may not be effected oncommercially reasonable terms,or at all.The instruments governing our indebtedness may restrict our ability to sell assets and our use of theproceeds from such sales.If we are unable to generate sufficient cash flow or are otherwise unable to obtain funds necessary to meet required payments of principal,premium,if any,and interest on our indebtedness,or if we otherwise fail to comply with the various covenants in the instruments governing ourindebtedness,we could be in default under the terms of the agreements governing such indebtedness.In the event of such default,the holders ofsuch indebtedness could elect to declare all the funds borrowed thereunder to be due and payable,together with accrued and unpaid interest,thelenders under our credit agreement,or any replacement revolving credit facility in respect thereof,could elect to terminate their revolvingcommitments thereunder,cease making further loans and institute foreclosure proceedings against our assets,and we could be forced intobankruptcy or liquidation.On February 15,2023,we entered into a LIBOR Transition Amendment with the lenders under the ABL Facility,which,among other things,replaced LIBOR with a term SOFR(of terms of one,three or six months,or if available,other periods of twelve months or less).Since the initialpublication of SOFR,daily changes in the rate have,on occasion,been more volatile than daily changes in comparable benchmark or marketrates,and SOFR over time may bear little or no relation to the historical actual or historical indicative data.It is possible that the volatility of anduncertainty around SOFR as a LIBOR replacement rate could increase loan rates and borrowing costs under the ABL Facility.Our debt instruments limit our flexibility in operating our business.Our debt instruments contain various covenants that limit our and our restricted subsidiaries ability to engage in specified types of transactions.A breach of any of these covenants could result in a default under our debt instruments.Any debt agreements we enter into
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