Disciplined Growth Strong Dividends

Transcription

1 Disciplined Growth Strong Dividends Analyst and Investor Conference Fiscal Year 2004 Essen, 24 February 2005 Harry Roels Chief Executive Officer RWE AG Dr. Klaus Sturany Chief Financial Officer RWE AG

2 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: 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 forward-looking 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 forwardlooking 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 * Footnotes are to be inserted manually (using copy and paste ). 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. 2

3 Today s agenda Highlights of 2004 and key topics for 2005 Harry Roels Divisional performance and Group results Klaus Sturany Outlook 2005 and financial targets Harry Roels 3

4 2004 Highlights Performance Group operating result +8% Net income excl. regular goodwill +10% ROCE target for 2005 already surpassed Dividend 1.50/share. Increase of 20% Debt Reduction Net debt at 12.4 bn Cost Reduction Old programme ( 2.6 bn p.a.) concluded Milestones of second programme reached Portfolio Disposal of RWE Umwelt close to completion Reorganisation of RWE Solutions initiated 4

5 Performance RWE Group results 2004 January December change million in % External revenue EBITDA Operating result Net income Last year excluding goodwill amortisation Cash flow from operating activities Capex Free cash flow EPS ( ) Last year excluding goodwill amortisation ( )

6 Performance 2005 ROCE target already surpassed in % (old method) 25 ROCE 20 WACC % 13.5% Target 2005: 11% 5 0 RWE Power RWE Energy RWE npower RWE Thames Water old new method method RWE Group* * Including discontinued operations. Ahead of target due to strong performance of Continental European energy business. RWE Thames Water and RWE npower behind schedule. Modified ROCE model in order to reflect IAS/IFRS changes as of

7 Performance German wholesale power prices remain our No. 1 value driver power price increase + volume effect - higher coal prices million million 25% operating result growth at Power Generation business unit power price increase - volume effect - maintenance cost - higher coal prices million million million 10-15% operating result growth at Power Generation business unit power price increase* +/- coal price effect >20% operating result growth at Power Generation business unit Power Generation business unit: 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. (expected impact on operating profit approx. 100 m) 7 7

8 Performance Optimised asset management: Monetisation of power plant optionalities Short Term Position Management (STPM) Formed with effect from January 1, 2004 along the lines of STPM UK. All of RWE Power s delivery positions are transferred to STPM two months prior to delivery. Optimising of power plant options is also the responsibility of STPM. New topping gas turbines at our lignite plant in Weisweiler Gas turbines combined with existing lignite fired blocks fully flexible load profile Capacity upgrade from 1300 MW to 1800 MW including increase in thermal efficiency for investment of only 150 million. Similar project for MATRA power plant in Hungary. 8

9 Performance Stable growth: Increase of the regulated asset bases in UK and US water UK: Start of 4 th regulatory period (AMP4) April 2005 March 2010* 5 bn ( 3.5 bn) investment; annual average 1 bn (+/-10%) Price increases awarded 2005/06 to 2009/10 of 22.1% plus inflation (phasing: 14.9%, 2.1%, 1.2%, 1.3% and 1.5%) RAB grows from 5.5 bn in 2004/05 to 7.4 bn in 2009/10 North America: Ongoing progress in rate cases with state regulators Annualised revenue increase of $ 128 m through rate cases since closing of the acquisition (January 2003) Capex approx. 500 m p.a. + approx. 70 m for small tuck-in acquisitions RAB grows from $ 5.7 bn in 2004 to $ 6.6 bn in 2009 Average water capex of 1.6 bn p.a. (+/- 10%) secures stable profit growth in the order of 5% CAGR * RAB and investment figures at estimated outturn prices. 9

10 Cost reduction Cost reduction remains high priority: Second programme well on track Old programme of 2.55 bn p.a. ( ) successfully concluded. Second programme of approx. 700 million p.a.: cutting costs due to Group reorganisation and acquisition synergies (RWE npower, RWE Thames Water, Czech gas) Annual savings in million synergies cost reduction due to Oct reorganisation target 2006 target 10

11 Debt reduction Continued reduction of net debt ( bn) Actual Target (< 17 bn) Target excludes effects from disposal of: Heidelberger Druckmaschinen Hochtief f/x effects 1 adjusted actual net debt at 1.4 bn 0.9 bn 0.5 bn 15.2 bn 5 0 1/ / / Based on exchange rates of ( 1 =): 1 USD 1.20; GBP 0.70; 2 USD 1.36; GBP

12 Portfolio Status of portfolio optimisation projects RWE Umwelt (environmental business) Disposal almost completed, closing expected in March 2005 Disposal process for residual part (30% of revenue) on track; several bids received RWE Energy RWE Solutions: Energy key accounts transferred to RWE Energy Reorganisation of remaining business (see next page) RWE Power RAG/STEAG: Closer cooperation in power generation intended. Talks on contractual agreements still ongoing RWE Thames Water Bulk of international water activities up for sale (outside of core markets in Europe and US) tender process initiated 12

13 Portfolio Reorganisation of RWE Energy s RWE Solutions business unit RWE Solutions old total revenue 2004 (in million) Energy Key Accounts / Contracting transfer to RWE Energy 922 Energy Services Concentration within the SAG Group ( new RWE Solutions), decision about future development within the next 2 years Non-core activities within RWE Solutions (transformer business, plant engineering etc.) Up for disposal, of which already sold: Transformer business RWE Piller (uninterrupted power supply) ( 330 million revenue) 13

14 Securing our future market position Strategy for upgrading our German power plant portfolio Lifetime extension where possible Capability enhancement of existing assets (e.g. 2 x 190 MW gas topping turbines at Weisweiler) Up to 3 GW of new capacity by 2010 Decision on lignite-fired power plant BOA 2/3 in Q (2100 MW) Optional: 700 MW hard coal plant, 800 MW gas-fired power plant (CCGT) Average capex : approx. 800 m p.a. (+/- 25%) Total of approx. 12 bn investment over 15 years (incl. nuclear phaseout) subject to emissions trading and other political factors 14

15 Securing our future market position Strategy for upgrading our UK power plant portfolio Lifetime extension where possible Capability enhancement of existing assets Compliance with environmental legislation Replanting steam turbines at Aberthaw and Tilbury Upgrading gas turbine at Didcot B Securing options for new build / asset purchases Optional: 2000 MW CCGT plant at Pembroke; application filed Optional: 1600 MW consented site at Staythorpe Total of 700 m capex for existing fleet through to 2009; new build investments dependent on environmental legislation (emissions trading, Large Combustion Plant Directive). 15

16 Securing our future market position Despite major investment, average annual capex will remain at around 4 bn from 2005 to 2009 RWE Thames Water 1600 m p.a. (+/-10%) incl. American Water: 500 m p.a. (+/-10%) 40% 30% RWE Power Power generation: 800 m p.a. (+/-25%) RWE Dea: 400 m p.a. (+/-10%) 5% 25% RWE npower 200 m p.a. (+/-50%) RWE Energy 1000 m p.a. (+/-10%) RWE Group: Approx. 20 bn capex programme for with annual capex of 4 bn (+/- 10%) 16

17 Regulation Update on German network regulation: electricity and gas Status of legislative process (new Energy Law) Approval by German parliament still pending Major regulations drafted but key items still under discussion: for electricity: Calculation methodology Process to develop incentive regulation Electricity tariff approval for residential customers by federal states Procedures and involvement of the states for gas: Gas grid access and tariff models Cost-based pricing versus benchmarking for transport system operators (TSO) 17

18 Regulation RWE to introduce a new entry-exit model for gas Major features of new RWE entry-exit model (as of H1 2005) Standardised and simplified access to the RWE transportation grid (high pressure, long distance) Less complexity by reduction of balancing zones Use of gas trading products for easier transactions across the zones No capacity check required: first committed first served 18

19 Performance 350 management staff incentivised by a high proportion of variable pay 100% individual bonus 80% 60% 50% 40% 35% company bonus fixed salary 60% 40% 20% 40% 50% 60% 65% new Long-Term- Incentive- Plan 0% RWE AG Board management level 1 management level 2 management level 3 company bonus 50% based on free cash flow 50% based on value contribution 19

20 Performance RWE free float increased from 78% to 89% Share of international investors increased from 18% to approx. 25% Other institutional shareholders 42% Other municipal shareholders 23% 10% USA/Canada 7% UK RW Energie Bet.-Ges. 10% 42% 7% Continental Europe excluding Germany Employee shareholders 2% Private shareholders 14% 18% Germany Münchener Rück 4.9% Allianz AG 4.3% As of January

21 Today s agenda Highlights of 2004 and key topics for 2005 Harry Roels Divisional performance and Group results Klaus Sturany Outlook 2005 and financial targets Harry Roels 21

22 Performance of RWE Power January December change million in % External revenue Power Generation RWE Dea Harpen CONSOL Energy* EBITDA Power Generation RWE Dea Harpen CONSOL Energy* Operating result (change excluding (de)consolidation and f/x effects) (+16.2) Power Generation RWE Dea Harpen CONSOL Energy* * Deconsolidation as of 09/30/

23 How forward selling impacts P&L (Germany) Base load in /MWh Forward >75% sold >90% sold Forward >25% sold >50% sold >75% sold >90% sold Forward >1% sold >10% sold >25% sold >50% sold >60% sold 24 01/01/ /01/ /01/ /01/ /01/ /15/

24 Performance of RWE Energy January December change million in % External revenue Regions Germany Regions International RWE Solutions Electricity & gas transmission Others/consolidation EBITDA Regions Germany Regions International RWE Solutions Electricity & gas transmission Others/consolidation Operating result (change excluding (de)consolidation and f/x effects) (+5.2) Regions Germany Regions International RWE Solutions Electricity & gas transmission Others/consolidation

25 Performance of RWE npower January December change change excl. million in% f/x in % 2 External revenue of which electricity /-0.0 of which gas EBITDA Operating result (change excluding (de)consolidation and f/x effects) (+17.4) 1 Excluding UK trading business, which was transferred to RWE Trading as of January 1st, %-change adjusted for the effect from change in foreign exchange rates. 25

26 Performance of RWE Trading January December change million 2004* 2003 in % External revenue EBITDA Operating result * Including former RWE npower trading business as of January 1st,

27 Performance of RWE Thames Water January December change change excl. million in% f/x in % 2 External revenue Europe 1 /other markets of which UK regulated Americas (North America/Chile) EBITDA Europe 1 /other markets of which UK regulated Americas (North America/Chile) Operating result (change excluding (de)consolidation and f/x effects) (+8.3) Europe 1 /other markets of which UK regulated Americas (North America/Chile) excluding continental European water business. Part of RWE Energy as of January %-change adjusted for the effect from change in foreign exchange rates. 27

28 Non-operating result January December change million (absolute) Capital gains Goodwill amortisation, impairment losses Restructuring/others Total

29 Financial result January December change million in % Interest result Interest accretion to long-term provisions Other financial result Total

30 Changes in RWE value contribution model With effect of Jan 1st, 2004 historical goodwill amortisation is netted against historical acquisition costs. To reflect this IAS/IFRS change and to keep the model simple and transparent, we adjusted the capital employed for the historical accumulated goodwill amortisation and amortisation of RWE npower customer accounts. This reduces the historical capital employed by 2.4 bn. In 2005 the water division s WACC will reduce from 8.0% to 7.5% due to a lower interest rate level and a reduced risk profile because of the intended disposal of international water activities. All other WACCs remain unchanged. 30

31 Value contribution by Division old method RWE Power RWE npower RWE Thames Water ROCE WACC Value Added % % % mill. mill. RWE Energy RWE Trading RWE Group new method change new vs. old RWE Power RWE Energy RWE npower RWE Trading RWE Thames Water RWE Group RWE Trading is monitored using the RORAC concept (return on risk-adjusted capital). 2 RWE Group including discontinued operations and others/holding/consolidation. 31

32 RWE cash flow statement January December change million (absolute) Income after tax Depreciation, amortisation, impairment losses and write-backs Increase/decrease in provisions Change in deferred taxes Disposal gains Other non-cash items Income after tax adjusted for non-cash items Change in net working capital and other balance sheet items Cash flow from operating activities Capex on fixed assets (of which growth capex approx. 1/3) Free cash flow

33 Development of net debt position 25 Capex +3.4 Dividends +0.9 Currency translation effect -0.2 acquisitions/ disposals -3.1 Cash flow from operating activities others Fair value of net debt related financial derivatives Net debt Net debt Exchange rates of 1 = $1.26; Exchange rates of 1 = $1.36;

34 Outlook for 2005 Operating result million forecast 2 RWE Power (incl. RWE Trading) RWE Energy RWE npower 604 RWE Thames Water Discontinued operations 110 Total operating result EBITDA Exchange rates of ( 1 =) USD 1.25; GBP Based on exchange rates of ( 1 =) USD 1.30; GBP Adjusted for deconsolidation (Heidelberg, RWE Umwelt, Turbogas) and f/x effects. 34

35 Today s agenda Highlights of 2004 and key topics for 2005 Harry Roels Divisional performance and Group results Klaus Sturany Outlook 2005 and financial targets Harry Roels 35

36 Performance Outlook for 2005 External revenue Operating result Net income Recurrent net income ROCE 13.5% million forecast 1 Capex on fixed assets ca. 4 bn 1 Based on exchange rates of ( 1 =) USD 1.30; GBP New method. For changes in methodology refer to charts 30,

37 Performance Stable business model continued profit growth: Solid base for increasing dividends Dividend Operating result ROCE* Cost reduction + Synergies increase >15% p.a payout ratio 50% as of 2006 at least 5% CAGR from organic growth 14% in m by year-end 2006 * New method. For changes in methodology refer to charts 30,

38 Performance We aim at a 50% payout ratio * as of 2006 Dividends in /share Target: increase >15% p.a payout ratio of 50% as of Payout ratio* 47% 50% * Payout ratio = Dividend net income adjusted for non-operating result (including tax effect) 38

39 Back-ups 39

40 Currency effects 2004 versus 2003 million 2004 to 2003 thereof currency* Total revenue EBITDA Operating result Net income Last year without goodwill amortisation billion 12/31/2004 to 12/31/2003 thereof currency* Net debt Currency exchange P&L (average) Balance Sheet rates (1 =): /31/ /31/2003 GBP USD

41 Electricity Price in Germany and UK / MWh Forward 2005 Forward 2006 / MWh Dec 03 Feb 04 Apr 04 Jun 04 Aug 04 Oct 04 Dec 04 Feb 05 Apr 05 Jun 05 Aug 05 Oct 05 Dec 05 Wholesale Peak Germany in /MWh * Wholesale Peak UK in /MWh * Wholesale Base UK in /MWh * Wholesale Base Germany in /MWh * 41 * At the end of the relevant month-end. 41

42 Coal price development /t CE Ø BAFA /t ce Ø CIF-NWE /t ce Ø CIF-NWE /t ce Ø BAFA /t ce 30 Jan 02 Mar 02 May 02 Jul 02 CIF NW Europe Sep 02 Nov 02 Jan 03 Mar 03 May 03 Jul 03 Sep 03 Nov 03 Jan 04 Mar 04 BAFA 2 Monthly May 04 Jul 04 Sep 04 Nov 04 Q4 05 Q3 05 Q2 05 Q Forward TFS (Traditional Financial Services Ltd.) 1 BAFA 2 Monthly expected 1 As of January 31, Bundesamt für Wirtschaft und Ausfuhrkontrolle (Federal Office of Economics and Export Control) 42 42

43 RWE Group electricity production January to December Germany UK Other Total Total in TWh International Lignite Nuclear Hard coal thereof contracts Gas Water and others thereof contracts Subtotal Electricity purchases* Total * Net, excluding trading. Purchases for physical deliveries to customers only. 43

44 RWE Group electricity sales volume January - December Germany UK Poland Hungary Others Total Total in TWh Private and commercial Business customers & key industrial accounts Distributors/ power utilities Electricity trading Total Net of electricity purchased from third parties. 2 Difference between electricity production and electricity sales volume due to grid losses, own consumption of lignite mines and pumping electricity. 44

45 RWE Gas sales volume January - December Germany Czech UK Others Total Total in TWh Rep Private and commercial Business customers & key industrial accounts Distributors/ power utilities Gas trading* Total * Net of gas purchased from third parties. 45

46 Cash flow profile 2003/ million Q1 Q2 Q3 Q4 Total Income after tax adjusted for non-cash items Change in net working capital and other balance sheet items Operating Cash flow million Q1 Q2 Q3 Q4 Total Income after tax adjusted for non-cash items Change in net working capital and other balance sheet items Operating Cash flow The quarterly cash flow profile shows how volatile the change in net working capital and other balance sheet items is. 46

47 Strong net interest coverage EBITDA / net interest Consolidation of Czech Gas and RWE npower for 8 and 7 months, respectively 11.2x Full inclusion of American Water, Czech Gas and RWE npower 8 7.5x 7.5x 1 8.0x 1, /31/02 12/31/03 09/30/04 12/31/04 1 Excluding one-off costs of 85 million related to the early buy-back of bonds in Q3/ Including realised gains/losses from sale of securities EBITDA/net interest ratio would be 7.7x. 47

48 RWE AG: flexible funding structure Average cost of gross debt at 5.2% Fully committed syndicated loan ( 2.0 bn 364 days 2.0 bn 5 years) 0.0 billion 4.0 billion for liquidity back-up and refinancing Commercial papers (up to 1 year) $2.3 billion $5.0 billion MTN programme (up to 30 years) 20 billion 17.2 billion Amounts used as of 12/31/

49 Financial assets and liabilities (as at 12/31/2004) 27.4 billion other 1.7 commercial paper 3.1 bank loans billion other financial assets other loans cash & cash equivalents bonds 11.0 securities held as current assets 1.0 securities held as fixed assets financial assets financial liabilities 1 December 31, 2003: 14.0 billion. 2 December 31, 2003: 31.8 billion. 3 Book value. 49

50 Gross financial debt currency and interest exposure 1 Gross financial debt as of December, 2004: 27.4 billion / Others 11% Indexed 1% Floating 17% $ 2 29% 60% Fixed 82% Long term financed (> 1 Year): 82% of gross debt Short term financed (< 1 Year): 18% of gross debt With debt in foreign currencies we hedge the translation risk of our international activities. 1 Including cross-currency swaps. 2 Including Chilean Peso. 50

51 Maturity profile of capital market debt 1 billion billion (Capital Market debt) 3.0 3, , , , RWE AG/ RWE Finance RWE Thames Water 2.0 2,0 16, , RWE npower American Water 1.5 1,5 12, , Capital Market Debt 1.0 1,0 8, , ,5 4, , , Capital market debt excluding commercial paper programme as per December 31, Nominal value 51

52 RWE AG: financing policy Funding is centralised at RWE AG Cash pooling agreements in place in our core regions RWE AG has domination and profit and loss sharing agreements* with all of its important German subsidiaries Refinancing of water activities sometimes subject to regulatory restraints (Thames Water, American Water) Clear cross default principles covering all principal subsidiaries (RWE npower, RWE Thames Water et al) No financial covenants * Agreement is pursuant to the articles of the German Stock Companies Act 52

53 Structural subordination in the RWE Group RWE AG (A+ / A1) / RWE Finance B.V. / Consolidated German Subsidiaries* 78% RWE Npower Holdings Plc Thames Water Aqua Holdings GmbH Thames Water Plc (A+ / A2) 11% RWE Npower Plc (A- / Baa1) 4% Thames Water Finance B.V. (A2) Thames Water Utilities Ltd Thames Water Utilities Finance Plc (A1) American Water 6% E town Corp. (A+) Pennsylvania Am. Water (A3) Indiana American Water Co. Am. Water Capital Co. (Baa1 / A-) Elizabethtown Water Co. (A+ / A2)<1% As of December 31, * Associated by profit & loss sharing agreement. Note: Structure simplified; percentages indicate quantity of group financial debt held at entity/group of entities (highlighted in light blue) including bonds, bank loans, leases. 53

54 IAS/IFRS rulings (I): Assessment of new and revised IAS/IFRS RWE has been applying IAS since fiscal 1998/99. Therefore no change from the compulsory use of IFRS accounting from 2005 onwards 2004 Business Combinations Project Phase I (IFRS 3/IAS 36/IAS 38) Switch from regular goodwill amortisation to impairment-only (as of 01/01/2004) Changes in Decommissioning, Restoration and Similar Liabilities (IFRIC1) Basically no changes in accounting policies necessary 54

55 IAS/IFRS rulings (II): Assessment of new and revised IAS/IFRS 2005 Financial Instruments (IAS 39) Deals with the recognition, measurement, hedge accounting and the disclosure of financial instruments. In general, no material changes are expected. Implementation project for the accounting of energy commodity transactions currently on track; final results will be determined at the end of March, Own-use commodity contracts are accounted for as pending contracts under the accrual method, i.e. they are outside the scope of IAS 39 (e.g. future physical sale of electricity or future physical purchase of coal). Share-Based Payment Transactions (IFRS 2) RWE already recognises provisions for the cost of share-based payments. Non-current Assets Held for Sale and Discontinued Operations (IFRS 5) We do not expect any material effects on net income. However, discontinued operations will be disclosed separately on the balance sheet. Emission Rights (IFRIC 3) For more details see next chart. New Balance Sheet Structure Because of IAS 1 (revised) current and non-current assets and liabilities will be disclosed separately respectively. 55

56 IAS/IFRS rulings (III): Emission Rights Under IFRIC 3 the emission allowances granted (asset) and the government grant (deferred liability) have to be measured at cost whereas the provision for emissions made has to be accounted for at fair value. IFRIC s methodology will lead to artificial income volatility and neglects the linkage between emission allowances granted and the emissions made. As a result, the industry has major concerns about IFRIC 3. The European Financial Reporting Advisory Group (EFRAG) also has strong reservations so that endorsement of IFRIC 3 in the EU appears unlikely. We support EFRAG's position and encourage the IFRIC to review its interpretation. 56