Generating Power and Value. Analyst Conference RWE Power/RWE Trading Essen, July 1, 2004

Transcription

1 Generating Power and Value Analyst Conference RWE Power/RWE Trading Essen, July 1, 2004

2 Forward Looking Statement These presentations contain certain forward-looking statements within the meaning of the US federal securities laws. Especially all of the following statements: Projections of revenues, income, earnings per share, capital expenditures, dividends, capital structure or other financial items; Statements of plans or objectives for future operations or of future competitive position; Expectations of future economic performance; and 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.

3 The new RWE Power Major Player in European Power Generation Analyst Conference RWE Power/RWE Trading Essen, July 1, 2004 Dr. Gert Maichel CEO RWE Power

4 Benefits of vertical integration of the energy business in the RWE Group Generation Trading Transmission Distribution Supply Continental Europe RWE Power RWE Trading RWE Energy United Kingdom RWE npower RWE npower Vertical integration throughout all stages of the power value chain: from generation to end customers Synergies through collaboration in the vertical system More flexible equalization of market fluctuations at particular stages 1

5 RWE Power major player in European power generation Agenda Activities under the RWE Power umbrella Energy mix and market share Determinants of the German energy market RWE Power s value levers 2

6 RWE Power: RWE Group s Continental European upstream platform RWE Power Division Continental European power generation and production of energy raw materials: Lignite, oil, and natural gas Key figures 2003 (excluding CONSOL Energy) Total revenue 7.8 billion Workforce 1 19,280 FTE Power generation TWh Capacity 35.7 GW RWE Dea 2 Other significant holdings Development and extraction of natural gas and oil (upstream) Harpen 2 Mátra (Renewables) (Lignite power/hungary) 1 As of Dec. 31, The shares are held by RWE AG; the companies are managed by RWE Power. 3

7 RWE Power s broad, flexible energy mix (2003)* Capacity 35.7 GW Generation TWh Capacity 33.8 GW Generation TWh 10% 15% 16% 3% 9% 19% 10% 12% 17% 3% 7% 20% Other Natural gas Nuclear energy Hard coal 28% 29% 30% 30% Lignite 31% 40% 31% 40% Continental Europe Germany * Including power plants that are not owned by RWE but which we can freely use thanks to long-term agreements. 4

8 Power generation: No. 2 in Europe, No. 1 in Germany EU 15 (2003): about 2,700 TWh Germany (2003): about 561 TWh Enel 6% Vattenfall 6% 32% RWE Power 14% Vattenfall E.ON 9% RWE* 9% 10% EnBW EdF 22% (incl. EnBW) 20% Others Others 48% 24% E.ON Source: 2003 annual reports; RWE s estimates * of which RWE Power 7%, RWE npower 2% See also Facts & Figures 2004, p. 82 ( 5

9 RWE sells out of a net long position in Germany Procurement contracts of RWE Energy subsidiaries/ EEG purchases RWE Power s long-term purchase agreements Own production* TWh 42.2 TWh 41.4 TWh TWh TWh 45.3 TWh TWh 15.1 TWh TWh Net long position sold to wholesale market Grid losses/own consumption Sales to private customers, businesses, industrial customers, and power utilities Basis 2003 Longs Shorts * Including power generation by subsidiaries of RWE Energy. 6

10 More than an asset operator: Our competitive advantages RWE Power s power plant portfolio offers advantages of scale and high flexibility thanks to its existing fuel mix. Long-term power purchase agreements strengthen this position RWE Power benefits from all the market s optionalities through market-oriented use of its power plants RWE Power is one of Europe s cost leaders RWE Power has access to lignite as an energy source through its own open-cast mines RWE Power s power plants are in technically favorable network positions (G-Component) and are near regions with high consumption RWE Power s power plant portfolio has large replacement needs in the near future; however, early decisions with respect to new construction give us a strategic advantage 7

11 Determinants of the German power market Reserve capacity Planned exit from nuclear energy Wholesale price changes Renewable Energies Act Market for system services Power market Power market Fuel costs Emissions trading Need for reinvestment in power plants 8

12 German power generation: Considerable replacement needed Age-related reduction in existing power plant capacities (in GW) Decommissioning assumed after 40 years* Übrige Other Gas Gas Steinkohle Hard coal Braunkohle Lignite Kernenergie Wasser Nuclear energy Source: VGB PowerTech e.v. Replacement capacity up to 40,000 MW between 2010 and 2020 (Reduction of replacement by lifetime extensions) Hydro * Decommissioning nuclear power plants in line with German Atomic Law (AtG), Availability assumption 90%. There is a need for substantial investment in Germany, which is growing considerably as a result of the exit from nuclear energy. 9

13 Particular capacity bottleneck in summer and winter Remaining power generation reserve capacity for Germany (GW) 1 GW Jan 02 Jul 02 Jan 04 Jul 04 Jan 05 Jul 05 Jan 06 Jul 06 Jan 08 Jul 08 Jan 10 Jul 10 Domestic generating plant capacity Germany: GW (2003) 2 Source: Union for the Coordination of Transmission of Electricity (UCTE): System Adequacy Forecast ( 1 Basis: third Wednesday 11 a.m. 2 Net generating plant capacity (VDN). Substantial generation capacity taken out (RWE: 3 GW already taken out) Some capacity only available part time (e.g. wind) Increased volatility causes increased optionalities 10

14 Integration of markets in Continental Europe remains limited Maximum net generating capacity in GW 1 Net Transfer Capacities (NTC) in GW 2 Transmission capacities between Germany and its neighboring countries are small compared with capacities installed in Germany Wholesale markets in Germany, Austria and Switzerland are gradually growing together. Due to its size, Germany is the dominating sub-market See also Facts & Figures 2004, pp. 108/109 ( 1 Source: Eurelectric Electricity Overview Indicative values for NTC Winter 2003/04, working day, peak hours. 11

15 Stable recovery of wholesale power prices Forward prices for base load power at the wholesale level in /MWh (Monthly averages for yearly production traded in prior years) 40 Ongoing price drivers in 2004 Growing capacity bottlenecks in in in 2001 Increased proportion of wind power Higher cost of fuels CO 2 emissions trading Source: RWE Trading Wholesale prices have risen but are still below new entrant levels. 12

16 RWE Power s value levers Cost management Use of market optionalities Power plant renovations Continuous increase in value contribution Upstream gas hedge CEE generation (contribution to integrated RWE Group strategy) 13

17 Major contributor to enhancing the Group s efficiency in million per year synergies 3,235 2,555 new program existing program of which RWE Power: 1.4 billion until 2006 Total 1.4 billion target for 2004 (= 55% of RWE Group target); thereof > 90% achieved. 14

18 Additional margin potential through the use of market optionalities The need for balancing power in Germany is growing (RWE s market share in 2003 was approx. 30%). However, competition is also becoming more intense The market for flexible power plant use is growing: greater fluctuations in supply and demand (e.g., climate extremes result in higher energy needs, but then wind capacity is often not available) Thanks to economies of scale and a balanced fuel mix, RWE Power is strategically well positioned to use its optionalities (e.g., targeted scheduling of outages and portfolio effect reduce the risk position) By bundling open generation positions and marketing these through RWE Trading (Long & Short Term Position Management), we are tapping additional margin from our asset businesses Best practice transfer with RWE npower (including outage management, organization of Short Term Position Management) 15

19 Replacement requirement as an opportunity Lifetime extension as optimal as possible Age structure of RWE Power s Power Plant Portfolio 2004 Duration Nuclear energy Lignite Hard coal Gas Excluding hydro power and pumped storage. Subject to 45-year normal life or the current contractual term of outside purchases. Extension of normal life/contract (possible, planned, already completed in part). Excluding the exit from nuclear energy. We are currently planning new construction of up to 3.3 GW by 2010 implementation dependent on political and economic conditions. 16

20 Strategy for new construction: Options for future value enhancement Optional / Permit applied for Decided Lignite power plant (BoA 2/3) Investment 1.2 to 2 billion Capacity 1,050 MW net to 2,100 MW net Commissioning from 2010 Topping gas turbines Investment 150 million Capacity 2 x 190 MW net Commissioning in 2006 Optional / Permit applied for Gas (CCGT) Investment 400 million Capacity 800 MW net Commissioning in 2007 Optional (later if BoA 2/3 double unit is built) Hard coal Investment 650 million Capacity 700 MW net Commissioning in 2010 Less than 3 billion invested by 2010 = up to 3.3 GW of capacity. 17

21 Power plant renovation is a cost-effective way to reduce CO 2 Specific CO 2 reduction costs in per ton CO Nuclear energy Lignite 2 Natural Hard coal 2 Hydro Wind Photovoltaic gas 2 Source: RWE Power 1 Information on German electricity generation; 2004 price level; related to old lignite units (fuel price risk for imported energy taken into account; subsidies for renewables taken into account). 2 New plants. 18

22 Closer cooperation with STEAG RWE and RAG, the No. 5 power generator in Germany, have signed a memorandum of understanding to further enhance their close collaboration RWE and RAG aim to collaborate even more closely in the construction of new or replacement hard coal power plants RWE Power has an option to participate at a later date in the new mainstay of German energy in the RAG Group being formed, the new STEAG RWE is granting RAG a 400 million credit line at market conditions. However, this is not a measurement indicator for the purchase of an equity interest The new STEAG bundles RAG s power generation activities in Germany an attractive business partner for RWE Power. 19

23 Utilization of Equity Gas Equity Gas/Oil (Upstream) natural hedge Power Generation Gas Midstream / Gas Downstream RWE Dea RWE Power RWE npower RWE Energy To provide equity gas as natural hedge for the RWE Group s gas and gas-fired power generation position RWE Dea equity gas already builds a good natural hedge for power generation use To capture margins and value in the upstream part of the value chain To increase value through organic growth, mainly based on exploration, field development, and farm-in agreements To grow the gas business largely in selected focus regions (North-West Europe, North Africa) 20

24 Contributing to the Group s integrated position in selected CEE Markets Central Eastern Europe offers growth opportunities PL Strong foothold in Hungary with Mátrai Erömü (RWE Power 51%), No. 2 in CZ SK Hungarian power generation (16% market share) and No. 1 in lignite mining (60% of production) SLO CR HUN Only vertically integrated positions targeted, no IPP business Primary core market Secondary core market Strong foothold to further develop the CEE energy business. 21

25 Summary High exposure to German wholesale price increases through strong in-house generation portfolio and net long position Flexible fuel mix with different volatilities Ability to create above-average returns through value-driven asset management Highly competitive cost structure CO 2 emissions trading likely to be manageable Beyond lifetime extension replacement strategy for power plants underway 22

26 The new RWE Power Major Player in European Power Generation Analyst Conference RWE Power/RWE Trading Essen, July 1, 2004 Dr. Gert Maichel CEO RWE Power

27 Key Financials of RWE Power Analyst Conference RWE Power/RWE Trading Essen, July 1, 2004 Antonius Voß CFO RWE Power

28 Agenda Key financials Key factors for future profitability Impact of power price developments Impact of fuel cost Cost reduction program Outlook

29 RWE Power: Key financials million Total revenue 2003 Jan Dec 9, % Operating result RWE Group: 5,551 million _thereof external revenue 4,077 EBITDA 2,631 Operating result CF from operating activities CAPEX excl. acquisitions 1,682 1,760 1, % CF from operating activities RWE Group: 5,289 million Return on capital employed (ROCE) 16.5% WACC before taxes Value added Workforce* 10.5% , % CAPEX excl. acquisitions RWE Group: 4,362 million * As at December 31 (full-time equivalent). RWE Group others RWE Power 2

30 24 How forward selling impacts P&L (Germany) Base load in /MWh Forward >75% sold >90% sold Forward >25% sold >50% sold >75% sold Forward >1% sold >10% sold >25% sold 24 01/01/ /01/ /01/ /01/2004 3

31 Impact of power price increase on 2004/2005 profitability Market-relevant German electricity output approx. 165 TWh Volume subject to dark spread, outages and emissions trading Output sold at wholesale conditions (except old contracts which will phase out in 2005) Power price impacts revenue with a time lag of at least one year The net impact of price and volume effects on RWE Power s operating result in 2004 will be approx million (excluding fuel price effects) For 2005 we expect an additional positive effect in the same range 4

32 Adverse effect of coal price developments /tce /tce Ø BAFA Ø CIF-NWE CIF-NWE (Cost Insurance Freight Northwest Europe, Mc Closkey s Coal Industry Service) TFS (Tradition Financial Services Ltd.) BAFA (Federal Office of Economics and Export Control) BAFA estimate 30 tce tons of coal equivalent Ø 2006 Ø 2005 Ø Q4/04 Ø Q3/04 May 04 Jan 04 Sep 03 May 03 Jan 03 Sep 02 May 02 Jan 02 5

33 Impact of fuel prices on 2004/2005 profitability Coal: High hard coal prices have a negative impact on the dark spread (= spread between wholesale power price and coal price per MWh) Increases in free-on-board hard coal prices are, however, partly compensated for by current fall in high-level freight rates If coal prices remain at the current high level it is likely that we would reduce our generation from hard coal next year Negative impact on RWE Power s 2004 operating result of million, for 2005 additional 100 million, approximately Gas: The gas price does not have a significant impact on RWE Power s operating result. This is because our short position in the power generation business is offset by the long position at RWE Dea. 6

34 Major drivers for the operating result of RWE Power s business unit Power Generation power price increase + small volume effect - higher coal prices power price increase - small volume effect - higher coal prices million million million - approx. 100 million power price increase* 0 no further negative coal price effect Business unit Power Generation: Compound average growth rate of operating result >20% per year from 2004 to 2006 * Includes expiration of old contracts at prices significantly below current market level. 7

35 Between 2000 and 2006 RWE Power cuts costs by 1.45 billion million 1,500 1,400 1,350 1, , To date, the ambitious targets have been fully achieved despite changed market conditions Further increases in the efficiency of existing power plants are limited due to: 1,300 closed and optimized production processes long investment cycles 1,200 1,100 Continuous improvement across all activities (particularly overhead, mining and outsourcing) Significant improvements with further power plant replacements forecast 2006 target fewer employees increase in productivity and efficiency 8

36 Between 2000 and 2006 RWE Power reduces staff by 6,750 FTE* FTE* 0 3,000 4,000 5,000 Reduction by 31% since ,000 5, , , forecast 2006 target * FTE = Full time equivalent. 9

37 Power generation cost mix (base load) All-in costs (including cost of capital), in /MWh Current costs Cost for newly built CCGT 1 RWE s advantages over newcomers: infrastructural advantages (fuel supply, network connection, etc.) 24 suitable sites for all kinds of power stations available scale and portfolio effects >80% of RWE Power s generation reinvestment in lignite and hard coal plants on brown field sites possible RWE base load mix 2 New entrant RWE 1 Combined cycle gas turbine; estimates based on gas price of 12.5 /MWh. 2 Mix of written off lignite and nuclear power plants. 10

38 Major parameters for RWE Dea profitability RWE Dea s operating results are mainly driven by production volumes, crude oil prices and USD exchange rates Oil and gas production in 2004 will remain stable on previous year s level Due to tax reasons it is not possible to hedge the complete oil production. The hedgeable volumes for 2004 and 2005 are largely fixed 2004 operating result will not reach previous year s level due to positive FX-hedge results in 2003 For 2005 we expect similar results as for the current year, depending on oil price and FX-rates development 11

39 RWE Power: Outlook 2004 by business units Business Unit Power Generation Total revenue EBITDA Operating result 2003 million 6,332 1,572 1, forecast Business Unit RWE Dea Total revenue EBITDA Operating result 2003 million 1, forecast 12

40 RWE Power: Outlook 2004 Total revenue EBITDA Operating result CAPEX excl. acquisitions million million million million 2003 unadjusted 9,250 2,631 1,682 1,065 Value added million 614 Workforce 2 FTE 19, pro forma 1 7,823 2,305 1, , forecast 1 Adjusted for structural effects (deconsolidation of CONSOL in September 2003). 2 As at December 31 (full-time equivalent). 13

41 Key Financials of RWE Power Analyst Conference RWE Power/RWE Trading Essen, July 1, 2004 Antonius Voß CFO RWE Power

42 Introduction of CO 2 Emissions Trading: Status and Impact on RWE Analyst Conference RWE Power/RWE Trading Essen, July 1, 2004 Dr. Henning Rentz RWE Power AG

43 German National Allocation Plan German Bundestag passed Zuteilungsgesetz (NAP Act) on Friday, May 28, Energy sector and energy-intensive industries will face: * Overall allocation: 503 million tons CO 2 ( ) 495 million tons CO 2 ( ) For replacements: 4 years transfer of allowances, after that 14 years without reductions Small reserve for new entrants (3 million tons CO 2 per year) Small extra allocation for shutdown of nuclear power plants (1.5 million tons CO 2 per year) Extra penalty for power plants older than 30 years with efficiencies η < 31% (lignite) 01/01/ /31/2009 η < 32% (lignite) as of 01/01/2010 η < 36% (hard coal) as of 01/01/2008 These installations receive 15% less allowances. Penalty does not apply when old plants are replaced by new ones within 2 years after the above-mentioned dates (i.e. 01/01/2008 and 01/01/2010). In these cases, the penalty will be refunded (for a maximum of 2 years) Relatively generous treatment of early actions, emissions from chemical processes and CHP * For further details see backups or Fact Book on RWE website. 1

44 can be regarded as manageable compromise Good news for RWE Rules of National Allocation Plan (NAP) will ensure a reliable framework for investments in new plants and for a broad energy mix in Germany Total allotment of CO 2 allowances in first and second trading period will ensure that Germany will reach its target without placing too heavy a burden on industry We regard this as a manageable compromise. RWE might make use of the transfer rule while investing in new generation capacity in Germany but also some bad news On the other hand, we face a significant burden due to the special penalty for comparatively old and less efficient lignite plants Extremely high costs for bureaucracy might easily reach 100 million per year (about 20 million per year for RWE) Investment decisions can only be made if the NAP Act has finally passed the legislative process and has been approved by the European Commission. 2

45 RWE s emissions balance still subject to uncertainty First Commitment Period ( ) Compliance factor: ; i.e.: allocation 3% short of average emissions It is still not clear how authorities will deal with exceptional non-availability of plants, use of biomass as added fuel or notified early actions which might increase allocation Limited remaining uncertainty for RWE For we expect official notification on the amount of credits to be allocated by September 2004 Second Commitment Period ( ) Compliance factor not yet known; overall allocation to trading sectors down from 503 to 495 million tons CO 2 per year RWE might make use of transfer rule. Amount of surplus credits depending on investment decisions Extra burden due to penalty for lowefficiency lignite plants More details when NAP for Second Commitment Period is submitted to EU Commission in June

46 UK: Scarce allocation to electricity sector Updated energy projections have resulted in an increase in the overall allocation. However, UK Government plans to allocate only 132 million tons CO 2 p.a., corresponding to 84% of 2002 emissions, to existing generators Inclusion of 2003 in the baseline period and additional allocation to mothballed units returned to service reduce the existing disadvantage of RWE npower relative to other UK generators The changes in the baseline period and allocation rules have significantly narrowed the competitor spread on allocation between major generators in relative terms Installation-level allocations will not be published before end July/early August 2004 Significant issues and uncertainties remain to be resolved including electricity sector projections, allocation to new entrants and the treatment of CHP plant, plant retrofitted with FGD, and plant commissioning at the end of the baseline period 4

47 Status National Allocation Plans in the European Union (as of June 29, 2004) 19 countries have submitted NAP-drafts EU Commission to scrutinize whether state aid rules are jeopardized Only three countries intend to reduce emissions below base line period (UK, D, SLO). Most member states delivered draft NAPs with significant over-allocation to installations EU Commission must intensify its work on harmonization of NAPs and implementation of necessary legal and technical preconditions. 5

48 EU-NAPs first assessment Reduction/increase of CO 2 emissions in % compared to base period Poland Italy Latvia UK Sweden Slovenia Luxemburg Austria Finland Ireland Netherlands Germany Denmark Source: Öko-Institut,

49 Introduction of CO 2 Emissions Trading: Status and Impact on RWE Analyst Conference RWE Power/RWE Trading Essen, July 1, 2004 Dr. Henning Rentz RWE Power AG

50 Generating Power and Value Analyst Conference RWE Power/RWE Trading Essen, July 1, 2004