Juergen Grossmann/Rolf Pohlig Report on the first half of 2011 Conference call for journalists At 11:30 a.m. CEST on 9 August 2011
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Juergen Grossmann
Ladies and Gentlemen,
Good morning and greetings to you all from us here in Essen.
My Executive Board colleagues Leo Birnbaum, Alwin Fitting, Rolf Pohlig, Rolf Martin Schmitz and I would like to welcome you to our conference call.
I apologise for the change of date at such short notice, but we naturally wanted to move quickly to give you the first-hand information about significant new developments at RWE that we have just conveyed to analysts and investors.
Yesterday, our Supervisory Board held intensive talks on the strategic direction of the company. It gave its full support to the Executive Board’s proposals.
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In addition, the Supervisory Board unanimously decided on the future composition of the Executive Board and appointed a Deputy Chairman to the Executive Board.
Peter Terium, who has been Chairman of the Board of Essent since 2009 and whom you all know, will become a member of the RWE Executive Board as well as its Deputy Chairman on 1 September 2011.
To speed up the generational change at the top of the company, I shall hand over my mandate as Chairman of the Executive Board to Peter Terium on 30 June 2012. Until then I will continue to put all my energy into working for our company.
When Peter Terium becomes Chairman of the Board, Rolf Martin Schmitz, who is also well known to you, will be appointed Deputy Chairman of the Board with effect from 1 July 2012.
The company considered a large number of highly qualified and experienced candidates, and we are delighted to have been able to select managers from within our ranks to fill these important management positions.
And we are happy that we started this process at an early stage and were able to bring it to a close with the decisions we made yesterday. This gives us planning security moving forward – something we consider lacking in current energy policy.
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Ladies and Gentlemen,
Recent political decisions to bring forward the phase-out of nuclear energy are associated with substantial financial burdens for us. They have already had an effect on our half-yearly result. The financial burdens resulting from the changes in German energy policy in the first half of 2011, including the introduction of the nuclear fuel tax, amount to around €900 million. These unexpected burdens have hit us at the height of our investment programme.
Despite rescinding the recent lifetime extension of nuclear power plants, the government has persisted with its nuclear fuel tax. We consider this tax to be questionable, in terms of both the German constitution and European law. For this reason we have lodged a judicial appeal. Furthermore, given the rescission of the nuclear energy lifetime extension, there is now no justification for such a tax.
Without these financial burdens, we are already operating in a difficult market environment in 2011. The margins for electricity generation are lower than last year and the situation in our gas midstream business is also having a negative impact on our result.
In a determined effort to counteract these multiple burdens, create some scope for future growth investments and – more importantly – secure our A rating, we have devised a package of
4 measures consisting of four elements:
• We have increased the divestment programme announced in February 2011. We are now aiming to divest a total volume of €11 billion rather than the original €8 billion.
We have already completed the divestment of Thyssengas and our shares in the Rostock power station. In addition, we have reached an agreement to transfer about 75% of our Amprion shares, as you will already know.
You will also be aware that, apart from ongoing negotiations to adjust our long-term gas procurement agreements, we are now looking at the option of divesting shares in our power station portfolio as part of a Memorandum of Understanding with the Russian gas producer Gazprom.
Furthermore, we are investigating the merits of selling non- core business such as Berlinwasser. We are also examining the possibility of applying the Amprion transaction to other grid activities and the sale of some of our portfolio in the German network and sales business, our generation business and RWE Dea.
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The extent and nature of such sales is yet to be determined as we examine all of our options.
This divestment programme should be completed by the end of 2013.
• As well as these planned divestments, we will also be curtailing our investment budget. From 2014, our annual capital expenditure on property, plant and equipment will amount to some €4 billion, a decrease of more than €1.5 billion compared to the medium-term period of 2011 to 2013. Half of these funds will be earmarked for growth investments. These include expansion of renewables and our activities in Central Eastern and South Eastern Europe in particular.
• The third element of our package of measures is to intensify our efficiency enhancement programme. The original target for 2012, of annual savings of €1.2 billion compared to 2006, was raised by €200 million to €1.4 billion back in February of this year. We have since raised our savings target for 2012 by a further €100 million to €1.5 billion. We shall also continue to reduce costs beyond 2012. At our Fiscal 2011 Press Conference in March next year, we will unveil a new efficiency enhancement programme for the period following 2012, which will include some specific savings targets.
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• The fourth point is that we plan to strengthen our capital base. This step will of course depend on developments on the stock markets. By issuing new shares and selling RWE treasury shares, we aim to create some more financial leeway for ourselves and secure our credit rating. We plan to increase equity by around €2.5 billion.
That sums up all I have to say about our current measures to strengthen our financial power and promote further growth.
This brings me to the key points of our business performance in 2011.
In the first six months of the current fiscal year, the operating result declined in comparison with the previous year by 33% to €3.3 billion. Recurrent net income – the basis for determining the dividend – even fell by 39% to €1.7 billion.
Due to the additional financial burdens associated with the phase-out of nuclear energy, we have had to revise our earnings forecast for fiscal 2011 as a whole. Consequently, we now anticipate our operating result will decline by about 25% rather than 20% and recurrent net income by about 35% rather than 30%.
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Rolf Pohlig will provide more details about our business performance in a moment.
But first, I would like to mention a few things that are also important to me personally.
Employee numbers have increased.
Our customer numbers in Germany have grown too. Consolidation effects have had some bearing on this, but also the fact that “eprimo” recently exceeded the 1 million customer mark.
So there can be no talk of customers running away from us. “Reliability” is becoming more and more important for customers and RWE is doing well in that department.
And here’s another piece of good news. Unlike many other energy providers, our German sales company will hold its baseload electricity and gas prices for residential customers stable until the end of this year.
With that, I would now like to hand over to Rolf Pohlig, who will shed more light on our business performance in the first half of 2011.
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Rolf Pohlig
Ladies and Gentlemen,
As Juergen Grossmann mentioned just now, our business performance in the first half of the year was significantly impaired by changes in German energy policy.
The operating result declined by 33% to €3.3 billion. This represents a decrease of 35% before various key consolidation and exchange rate effects.
And now for a brief look at the individual divisions.
Our Germany division achieved an operating result of €2.2 billion, which was 31% below that of the previous year.
As part of that decline, the operating result of our electricity generation business in Germany decreased by 43% to just under €1.3 billion. The major factor in this downward trend was some €700 million caused by the sudden change in German energy policy.
Biblis A and B were forced to decommission immediately; the decommissioning of our five plants earlier than planned also necessitated an increase in our provisions for nuclear energy; in addition, we had already incurred margin losses due to the moratorium on nuclear energy imposed by the German government in March, which included the immediate shutdown of 9 operations at Biblis A and B. The tax on nuclear fuels which took effect for the first time during that period made for an additional negative impact of €200 million on our balance sheet. Aside from these energy policy changes, unfavourable trends in the commodity markets led to further financial burdens.
In the Sales/Distribution Networks division, the operating result declined by 4% to €943 million. In our grid business, transit volumes and the income generated from them also declined due to prevailing weather conditions. We incurred higher costs for maintenance measures as well. On the other hand, some positive effects resulted from the first-time full consolidation of the NVV Group.
The Netherlands/Belgium division achieved an operating result of €187 million in the first half of the year, 46% less than in the previous year. It is worth noting, however, that starting in 2011 we are reporting on some segments of the gas midstream business of Essent under RWE Supply & Trading. The earnings contribution of these activities was extraordinarily high in the previous year due to factors such as the prevailing weather conditions. In addition, we suffered margin decreases in our electricity generation business, though this was partially offset by cost reductions and higher sales margins.
On a brighter note, the operating result of RWE npower more than doubled, increasing to €352 million. The rise is primarily attributable to our sales activity, where margins in our wholesale customer business improved. 10
The increase in residential customer tariffs in early January provided some additional relief. They helped us to absorb some higher prices on the electricity and gas procurement side.
In the Central Eastern and South Eastern Europe division, the operating result declined by 4% to €691 million. Net of exchange rate effects, a decrease of 8% was incurred. Our earnings position in Hungarian electricity sales deteriorated partly because the national regulator lowered the allowable margins in the residential sales segment. The fact that, in the previous year, the Hungarian government had introduced a special tax on energy utilities and companies operating in other sectors also had a negative impact. In our Czech gas business, declining gas sales led to a drop in our sales earnings.
In our Renewables division, higher generation volumes and the recent increase in electricity prices led to an improvement of €63 million – making a total for the period of €89 million.
RWE Dea increased its earnings by 74% to €334 million on account of the higher oil and gas prices realised, as well as increased oil extraction and lower exploration costs.
Trading/Gas Midstream closed with an operating loss of €598 million, after posting a profit of €278 million in the same period
11 last year. The performance of our trading business was unusually poor in the first half of the year. In addition, we benefited to a lesser degree than in 2010 from the proceeds of successful forward transactions in previous years. This applies in particular to the external sale of electricity by RWE Power and RWE npower.
In our gas midstream business, our earnings position remains compromised by the fact that we have to pay much higher prices for the gas we procure on the basis of oil-indexed, long-term contracts than we can possibly achieve when on-selling it on the market. There were, however, some positive effects from the takeover of parts of the midstream business of Essent.
The non-operating result improved significantly. At minus €210 million, it was 0.8 billion above the level of the previous year. This is primarily attributable to the trend in commodity derivatives, which served to shore up our core business this half- year, after having a negative impact on us in 2010. In addition, we achieved divestment gains from the sale of Thyssengas and a minority shareholding in a hard coal power station in Rostock. On the other hand, impairment losses in our Dutch power station portfolio and provisions for personnel measures put some downward pressure on our earnings.
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The effective tax rate was 27%, which was below the level of last year. For the year as a whole, we are expecting a slightly higher figure.
As you know, the key determinant of our dividend policy is recurrent net income, adjusted to exclude any special effects. In the first half of the year, this was around €1.7 billion and thus 39% lower than in the same period last year.
Capital expenditure on property, plant and equipment rose by more than 8% to around €2.7 billion. Expansion and modernisation of our electricity generation capacity continue to be the main focus of our investment activities.
With that, I now hand you back to Juergen Grossmann.
Juergen Grossmann
Thank you, Rolf, for your comments.
Ladies and Gentlemen,
The government wants the energy industry to be transformed. Our strategy of becoming “more sustainable, more robust and more international” is making a constructive contribution to that process. In doing so, we are also forging ahead with the reorganisation of the RWE Group.
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The vast majority of our planned capital expenditure through to 2013 is devoted to the realignment of the energy industry. We are investing more than €5 billion alone in carbon-neutral or low- carbon electricity generation.
We take the transformation of the energy industry seriously and are already making an active contribution towards achieving that goal.
This includes the massive expansion of renewables and in particular the increased use of wind power, biomass and hydropower.
By 2013 we will have invested €3.9 billion in renewables, €1.3 billion of that in Germany alone.
RWE Innogy, with capacity of 445 MW, is already the largest supplier of onshore wind power in Germany, and a further 200 MW is planned. Europe-wide, Innogy now has onshore wind power capacity of 1,600 MW, with around 3,200 MW currently being developed in addition.
The offshore wind power capacity of Innogy will be expanded by the year 2014 to exceed 1,000 MW. Some 300 MW of that is being produced by the “Nordsee Ost” (North Sea East) wind farm off the Heligoland coast.
And what’s more, RWE Innogy is also successful when it comes to venture capital. Recently, RWE Innogy Venture Capital came 14 second in the ranking of the most important and successful funds worldwide.
In parallel with this expansion of renewables, the construction of our new, highly efficient, low-carbon gas-fired power station is well under way. We are on the home straight with this project.
Once our gas-fired power stations in Lingen and Staythorpe are completed, further projects will follow:
In the Netherlands, Moerdijk 2 in late 2011 and Claus C in the spring of 2012.
By the end of 2012, Pembroke in the United Kingdom and Denizli in Turkey.
This means that within just three years from now, including the plants in Lingen and Staythorpe, we will be commissioning six state-of-the-art low-carbon gas-fired power stations with a total capacity of 7,200 MW.
In the interests of sustainable development, we are also investing in the modernisation and expansion of the electricity grids.
Working in collaboration with partners in the industry and scientific research, we are turning the Bitburg-Prüm district of the Eifel region into a model region for smart metering on the electricity grid, the motto here being “Smart Country”. 15
On the subject of “smart”: a few days ago we launched a new campaign under the slogan “RWE – Advancing intelligent energy”. Intelligent energy stands for: innovative, dialogue- oriented and efficient.
Under the intelligent energy seal of quality, we are the first energy utility company to pool our future-oriented technologies, products and services in the following way:
• Technologies such as smart grids, hydropower stations and fluidised-bed drying with internal waste-heat utilisation;
• Products such as smart meters, SmartHome and RWE SmartLine power;
• and Services such as our energy efficiency advisory service and electric mobility.
As you can see, with our high level of investment and our many different projects, we are actively working to remodel the energy supply.
When it comes to redefining the future, we are right at the forefront – including our commitment to research and development.
At the same time, completion of our coal-based power station projects BoA 2&3, Hamm and Eemshaven – the second element 16 in our strategy – gives us greater resilience. In doing so, we are putting our electricity generation capacity on a stable, long-term footing and improving our carbon footprint at the same time.
Once all of our new-build coal and gas projects have been completed, our power station portfolio will be one of the most technically advanced in Europe by 2014.
We will also become more robust by forging further partnerships. We do not have to do everything on our own and we do not have to own everything outright.
With our GEKKO project in Hamm, we have taken the timely initiative of entering into joint ventures to build new power stations. It is only logical and sensible to explore the option of further strategic partnerships for electricity generation. Collaborative models are also conceivable for some of our current projects such as BoA 2&3 or the hard-coal power station in Eemshaven.
Our growth in renewables and our investments in power stations are increasingly being undertaken with a conscious international approach to our business at a European level – the third element of our strategy.
Our regional focus is on the growth markets of Central Eastern and South Eastern Europe, including Turkey.
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However, our increasing international diversification does not mean we are turning our backs on the German market. Germany is and always will be important to us. When I say that we are actively working towards transforming the energy industry, we are doing that first and foremost here in Germany.
Ladies and Gentlemen,
The premature phase-out of nuclear energy and the resultant financial burdens make it much harder to reshape the energy landscape.
The German government’s energy concept of 2010 was a big enough challenge for RWE. The restructuring of our electricity generation in response to that policy was a huge undertaking at the time.
The premature phase-out of nuclear energy in Germany has made that challenge very much more difficult – in a commercial and financial sense in particular. The already high cost of realigning the energy industry will rise exponentially in the absence of nuclear power. Current studies on the subject put the cost at hundreds of billions of euro.
You see, new, comparatively less capital-intensive gas-fired power stations alone cannot close the gap created by the staggered phase-out of nuclear energy due to economic reasons. In the foreseeable future, the “Clean Spark Spread” will not be sufficient for commercial companies financed by the 18 capital market at normal market rates – not to mention the critical issue of a growing dependence on gas imports.
New, hard-coal-fired power stations could replace nuclear energy, but there is a lack of social acceptance for such technologies, irrespective of any commercial considerations.
This means that renewables will have to bear the lion’s share of the transformation of the energy industry. They will have to be expanded even faster than planned due to the premature phase- out of nuclear energy. But that also means the lion’s share of the transformation will be based on very expensive and very capital- intensive forms of power generation.
In addition, by far the most expensive and most capital-intensive of all these forms of electricity generation is also the one attracting the most government subsidies, namely photovoltaics.
The capital and investment required for the switch to alternative forms of electricity is enormous: and this is capital that the energy companies themselves will have to invest. At the same time, the government is interfering in the market process more and more.
We are not only confronted with new financial burdens in the order of billions of euro in the wake of the nuclear fuel tax and the demise of nuclear energy, but also – as a direct consequence of this – the pressure from financial markets and rating agencies is also on the rise. 19
I am not exaggerating when I say that no other branch of industry is faced with such major challenges as the energy industry is today. Essentially it is about striking a delicate balance between massive investments and solid finances.
We had already introduced a range of measures to strengthen our financial base at an earlier stage.
But these measures will not be sufficient – particularly since the about-face in German energy policy – to expand our financial leeway to the degree that is required.
This is already evident in our half-year results for 2011. For this reason, we have now introduced the package of measures I mentioned earlier, to strengthen our financial position. We have taken this course of action in response to the government’s decision to reshape the German energy landscape.
So what now? This brings me to our outlook.
As I said, we have had to adjust our forecast for 2011 downwards.
However, we have slightly raised our medium-term outlook for 2013. Set against the loss of earnings from the change in energy
20 policy are the positive effects from increased oil and gas prices, improved electricity margins and further efficiency enhancements. Based on our current forecasts, the operating result will close at around €5.9 billion. For recurrent net income, we anticipate around €2.5 billion. However, this does not take into account any future disposal of companies as part of our divestment programme.
Let me sum up in six points:
Point one: The premature phase-out of nuclear energy has been decided by the government. The primacy of government prevails and we accept that. Our focus is on the future. We are a dependable partner in the transformation of the energy landscape. We can also see the opportunities this presents and intend to take advantage of them.
Point 2: The rescission of the lifetime extension of nuclear power stations has hit RWE hard, but it has not knocked us off course. We are dealing with the situation the government has created, in a political and legal context.
Point 3: Europe remains our sphere of action. But Germany remains our key market. We are excellent players on markets we are familiar with, both regionally and in terms of products. And we focus on these markets. Regional presence remains one of our guiding principles. The transformation of the energy industry is partly based on decentralised business models such as 21 onshore wind farms and smart electricity distribution systems. We are proactively driving these trends.
Point 4: RWE is involved in almost all of the forward-looking initiatives – from A for Autostrom and E for energy efficiency to Z for zero-carbon, green power. We recently signed a 15-year contract with German Rail for the annual supply of 900 million kWh of electricity from our hydropower stations.
Point 5: With our corporate strategy of becoming “more sustainable, more international, more robust”, we are staying on course for the future. Our strategic alignment largely mirrors the government’s wish to transform the energy industry and make it more environmentally friendly.
Point 6: These key messages describe our vision of being a competent and proactive RWE – an RWE that is firmly anchored in the ranks of European energy utilities.
That’s enough from us for now.
The floor is now yours. We look forward to your questions. We certainly have more than enough to discuss.
Thank you very much.