Power Generation – Will Drivers
Remain Favourable?
Antonius Voß
CFO, RWE Power AG
DrKW German Investment Seminar
New York, January 9-11, 2006
Forward Looking Statement
This presentation contains certain forward-looking statements within the meaning of the US federal securities laws. Especially all of
the following statements:
n
Projections of revenues, income, earnings per share, capital expenditures, dividends, capital structure or other
financial items;
n
Statements of plans or objectives for future operations or of future competitive position;
n
Expectations of future economic performance; and
n
Statements of assumptions underlying several of the foregoing types of statements
are forward-looking statements. Also words such as “anticipate”, “believe”, “estimate”, “intend”, “may”, “will”, “expect”, “plan”,
“project” “should” and similar expressions are intended to identify forward-looking statements. The forward-looking statements
reflect the judgement of RWE’s management based on factors currently known to it. No assurances can be given that these
forward-looking statements will prove accurate and correct, or that anticipated, projected future results will be achieved. All forwardlooking statements are subject to various risks and uncertainties that could cause actual results to differ materially from
expectations. Such risks and uncertainties include, but are not limited to, changes in general economic and social environment,
business, political and legal conditions, fluctuating currency exchange rates and interest rates, price and sales risks associated with
a market environment in the throes of deregulation and subject to intense competition, changes in the price and availability of raw
materials, risks associated with energy trading (e.g. risks of loss in the case of unexpected, extreme market price fluctuations and
credit risks resulting in the event that trading partners do not meet their contractual obligations), actions by competitors, application
of new or changed accounting standards or other government agency regulations, changes in, or the failure to comply with, laws or
regulations, particularly those affecting the environment and water quality (e.g. introduction of a price regulation system for the use
of power grid, creating a regulation agency for electricity and gas or introduction of trading in greenhouse gas emissions), changing
governmental policies and regulatory actions with respect to the acquisition, disposal, depreciation and amortisation of assets and
facilities, operation and construction of plant facilities, production disruption or interruption due to accidents or other unforeseen
events, delays in the construction of facilities, the inability to obtain or to obtain on acceptable terms necessary regulatory approvals
regarding future transactions, the inability to integrate successfully new companies within the RWE Group to realise synergies from
such integration and finally potential liability for remedial actions under existing or future environmental regulations and potential
liability resulting from pending or future litigation. Any forward-looking statement speaks only as of the date on which it is made.
RWE neither intends to nor assumes any obligation to update these forward-looking statements. For additional information
regarding risks, investors are referred to RWE’s latest annual report and to other most recent reports filed with Frankfurt Stock
Exchange or SWX Swiss Exchange and to the material furnished to the US Securities and Exchange Commission by RWE.
DrKW German Investment Seminar 2006
RWE has the highest leverage to increased
German wholesale power prices
Market Share in German Power Market 2004
34% RWE Power
14%
Vattenfall
10%
EnBW
19%
Others
23%
E.ON
Total volume 562 TWh
2
DrKW German Investment Seminar 2006
Forward prices & how we sell forward (Germany)
Base load in €/MWh
Base load in €/MWh as of 12/30/2005
42
40
38
36
34
Forward
2005
32
30
28
26
>25% sold
>50% sold
>75% sold
>90% sold
>10% sold
>25% sold
>50% sold
>95% sold
>10% sold
>55% sold
24
54
52
50
48
46
44
42
40
38
36
34
32
30
28
26
24
50
48
46
44
42
40
38
36
34
32
30
28
26
24
Forward
2006
>1% sold
Forward
2007
>1% sold
07/01/2003
01/01/2004
DrKW German Investment Seminar 2006
07/01/2004
01/01/2005
12/07/2005 01/01/2006
3
The capacity bottleneck
Remaining power generation reserve capacity for Germany 2002–2010 (GW):1,2
UCTE expects German power supply to fall short of the 5% minimum reserve capacity
GW
8
5% =
minimum
reserve capacity
6
4
2
0
Jan 02 Jul 02 Jan 04 Jul 04 Jan 05 Jul 05
Jan 06 Jul 06
1
Basis: third Wednesday 11 a.m.
2
Domestic generating plant capacity Germany:114.9 GW (2004);
Estimated net generating plant capacity for 2005-2010 (UCTE).
Jan 07 Jul 07
Source: Union for the Coordination of Transmission of Electricity (UCTE):
System Adequacy Forecast 2002-2006 and Forecast 2005-2015. (www.ucte.org)
DrKW German Investment Seminar 2006
Jan 10 Jul 10
4
Development of fuel costs
€/tCE
85
80
75
Ø CIF-NWE 2004
67,44 €/t ce
70
65
60
55
Ø BAFA2 2004
55.36 €/t ce
Ø BAFA2 2002
44.57 €/t ce
50
Ø CIF-NWE 2003
43.74 €/t ce
45
40
Ø BAFA2 2003
39.87 €/t ce
Ø CIF-NWE 2002
39.40 €/t ce
35
30
Jan 02
1
2
Jun 02
Nov 02
Apr 03
Sep 03
Feb 04
Jul 04
Dec 04
May 05
CIF – NW Europe
BAFA 2 – Monthly
Forward TFS (Traditional Financial Services Ltd.)1
BAFA 2 – Monthly expected
As of December 2005.
Bundesamt für Wirtschaft und Ausfuhrkontrolle (Federal Office of Economics and Export Control)
DrKW German Investment Seminar 2006
Oct 05
Q3/2006
5
Impact of emissions trading
Theoretical power pricing with and without emissions trading
assumed range of power demand
example:
demand 10:00 on June 6
=> marginal plant is
hard coal old
gasturbine,
old
power price
market price incl. CO2
impact of emissions trading
on power price
ccgt2,
new
CO2-costs of fossil fuel
fired power plants
market price excl. CO2
nuclear
lignite,
new
hard
coal,
new
lignite,
old
hard
coal,
old
variable costs of power plants (excl. CO2)
Must run 1
power installed
1
2
Must run: run of water, wind, CHP
ccgt = combined cycle gas turbine
DrKW German Investment Seminar 2006
6
Emission trading – the catalyst for
cross commodity convergence
n
Primary fuels and CO2 have never had such a direct impact on power prices
and have – via the emissions market – induced higher volatility onto the power
markets
n
The CO2 trading mechanism exported the UK gas price dependency across all
of Europe and hence also created strong correlations among Continental power
prices
0.966
IPE Oil
0.945
NBP Gas
0.963
CO2
0.977
German Power
0.967
UK Power
0.975
(November 2005)
0.971
Nordic Power
n Because of high correlations, hedging opportunities for cross commodity
products and power location spreads are growing
n The CO2 price impact is not fully reflected in 2007 forward prices. 2006 forward
prices trade ca. 2-3 Euro higher.
7
DrKW German Investment Seminar 2006
Upgrading our German power plant portfolio:
Current status
n Lifetime extension of existing
plant where possible
n New 2,100 MW lignite-fired plant (BoA 2/3)
(subject to allocation of CO2 certificates)
Capex
Capacity
Commissioning
Efficiency
€ 2.2 bn
2,100 MW net
2010
43% (30% CO2 reduction
compared to average old plants)
Capex
Capacity
Commissioning
Efficiency
€ 1.3 bn
1,500 MW net
2011/2012
46% (20% CO2 reduction
compared to average old plants)
n New 1,500 MW hard-coal plant with
potential partners (subject to allocation
of CO2 certificates)
n 800 MW gas plant (option)
DrKW German Investment Seminar 2006
8
“High gas prices” is a synonym for “competitive
advantage of coal fired generation”
n Gas prices are expected to stay high or to rise
n As a result of this, coal and lignite fired power plants will increase their competitiveness
–
increasing coal demand can be met at slowly rising marginal exploration cost (cost curve
flatter than for hydrocarbons)
–
investments in enhanced coal fired power plants are already under way and will increase the
efficiency of this technology further (12% already achieved over the last decades)*
–
Coal can reach 50%+ thermal efficiency through high pressure/high temperature technology
–
coal resources are expected to last at least another 175 years, whereas current estimates
for gas and oil range around 40 years**
n New options to mitigate the impact of carbon
–
More flexible carbon schemes, which allow for ”joint implementation” and “clean
development mechanism” (JI / CDM), will result in less price pressure on the certificates
and will allow for coal to expand its competitive advantage
–
Increased coal fired power plant efficiency will also take some pressure out of the market
* Source: VGB Powertech data for hard coal units in Germany
** Source: IEA
DrKW German Investment Seminar 2006
9
Update on Group Topics
Ingo Alphéus
Vice President Investor Relations, RWE AG
DrKW German Investment Seminar
New York, January 9-11, 2006
RWE to Divest American Water and
Thames Water
n
RWE has decided to exit from its water activities in North America and
the UK to focus on its core European electricity and gas business
n
Process will be initiated through an evaluation of various divestment alternatives
for American Water
n
Once the American Water disposal is well underway, RWE will initiate the
Thames Water divestment
n
RWE intends to increase the payout ratios for 2006 and 2007 and also not
to refinance debt maturing in this period
n
Under observance of our strict criteria for strategic fit and financial performance
we will continue to consider opportunities for value-adding acquisitions in the
European energy business
11
DrKW German Investment Seminar 2006
What Has Changed Since Our Initial
Entry into the Water Business?
2000/2001
2005
n
Multi-utility
n
Focus on energy
n
US strategy
n
Europe as core region
n
Global water player
n
Regional players successful
Valuation
n
Assumption that performance and
growth justify premium
n
Water division not fully valued as
part of RWE
Profitability
n
Power business in Germany
making cash losses
n
Power business in Germany a key
success-factor
Free Cash
Flow
n
Not a limiting factor
n
Ambitious dividend target
Cross-border consolidation not an
obvious trend
n
Increasing pace of liberalization
and consolidation
Strategic Fit
European
n
Environment
12
DrKW German Investment Seminar 2006
Our Geographic Focus is the European
Core Market between UK and CEE
UK: Maintain leading
position in the energy
market
Germany: Maintain strong
position in the gas market
Central Eastern Europe:
Expand in current RWE
markets and selectively
occupy positions in new
markets
Netherlands
U.K.
Poland
Germany
Czech
Republic
Slovakia
Austria
Hungary
Croatia
Netherlands:
Build leading position in
electricity and gas
DrKW German Investment Seminar 2006
European Gas:
Expand pipeline and
storage business,
secure access to LNG
(regasification)
13
RWE Will Evaluate Opportunities According to
Strict Acquisition Criteria
Strategic
n
Strengthening RWE’s position in
converging European energy market
n
Financial
n
Evaluation of assets according to
criteria of attractiveness
ROCE has to match WACC in the 3rd
year of full inclusion of acquired assets
(including goodwill)
n
IRR > Hurdle rate (after tax)
– Growth potential
n
Target rating: Strong single A (based
on current rating methodology)
n
New cap for Group net debt of
€ 10-12bn (old cap: € 17bn) (a)
– Risk profile
– Available market position
– Regulation
n
Quality of business
n
Synergy potential with existing assets
and potential for standalone efficiency
enhancements
(a) Based on an exchange rate of €1 = GBP 0.70
DrKW German Investment Seminar 2006
14
Reduced Investment Requirements
RWE 2004 Capex
RWE Trading
Discontinued 5.9%
0.1%
RWE npower
4.4%
RWE
Power
19.3%
RWE
Thames
Water
42.7%
RWE
Energy
27.6%
Capex: €3.4bn
Free Cash Flow: €1.5bn
Free Cash Flow / Capex: 44%
RWE Pro-Forma 2004 Capex
Discontinued
RWE Trading
10.3%
0.2%
RWE
npower
RWE
7.6%
Energy
48.2%
RWE
Power
33.7%
Capex: €2.0bn
Free Cash Flow: ca. €1.5bn
Free Cash Flow / Capex: 75%
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DrKW German Investment Seminar 2006
Use of Proceeds – Cash to Investors
Shareholders
n
n
RWE AG has a low proportion of equity
with limited retained earnings. Any
distribution therefore will have to come
from operational profit growth in 2006/07
Upon closing of the American Water
transaction RWE aims to increase the
payout ratio for fiscal year 2006 above
the stated level of 50% of recurrent net
income(a) to a level of 70-80%
n
Upon closing of the Thames Water
transaction we aim to raise the payout
ratio over the stated 50% for a second
time (with dividend 2007) to a level of
70-80%
n
For fiscal 2008 and beyond we will
positively review the payout ratio (50%
serving as a floor)
DrKW German Investment Seminar 2006
Fixed Income Investors
n
No refinancing of RWE debt maturing in
2006 and 2007 (ca. €5 bn in bonds and
bank loans)
n
Strong cash flows will allow further
reduction of debt
n
New cap for Group net debt of
€ 10-12bn (old cap: € 17bn)
(a) Recurrent net income = net income adjusted for nonoperating result and one-off tax items
16
German electricity and gas networks:
Waiting for incentive regulation
n All grid fees will be subject to prior approval (ex-ante regulation). They can be
reviewed retrospectively back to the formal start of regulation
n Grid operators with less than 100,000 electricity or gas customers can be
regulated by the 16 federal states. The federal states may delegate
responsibility to the national regulator ‘Bundesnetzagentur’ (BNA)
n Current cost accounting will be maintained for existing assets. As of 2006,
investment in new assets will be based on historic cost accounting with
inflation-adjusted returns
n Within 12 months from the start of regulation (July 2005), the BNA shall
design a system of incentive regulation. Incentive regulation is expected to
become effective in 2007
n For the gas grid, an Entry-Exit model will be introduced
n The tariff-rate approval by the federal states for end-customer electricity tariffs
will be abolished two years after the formal start of regulation
17
DrKW German Investment Seminar 2006
UK power & gas: Strong underlying business –
Likely turnaround in 2007
n Revised generation hedge policy: RWE npower now only monetises asset
value through symmetrical forward hedging of spreads (power, fuel, CO2)
Performance
2005
2006
n
Low-priced legacy contracts
n
Power, fuel and carbon fully hedged
n
Low-priced power hedges phasing out
n
Power sold ca. 95%, fuel and carbon hedged
accordingly
n
Strengthening generation margins as CO2 costs
feed into realised power prices (subject to retail
margins)
n
Power sold ca. 50%, fuel and carbon hedged
2007
Cost of
CO2
certificates
Shortfall
compared to
expected
emissions:
ca. 7-9 m t p.a.
(subject to
actual output)
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DrKW German Investment Seminar 2006
RWE: Stable business model – continued profit
growth: Solid base for increasing dividends
Dividend
Operating result
ROCE
Cost reduction
+ Synergies
Net financial
debt cap
at least
5% CAGR
from organic
growth
14%
in 2006
€ 700 m
by year-end
2006
max.
€ 10-12 bn*
2005:
increase
>15%
2006/07:
extraordinary
payout ratio
70-80%*
as of 2008:
50% floor
* Upon closing of sale of UK and US water activities.
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DrKW German Investment Seminar 2006