Deep dive Grid & Infrastructure Sell Slide Brunch, Essen innogy SE Bernd Böddeling CFO Grid & Infrastructure 1 December 2016
Grid & Infrastructure Grid & Infrastructure at a glance Highly predictable, regulated earnings contribution Grid & Infrastructure A leading European distribution grid operator 1 Strong development of 13.3bn RAB2 with 9% RAB increase 2 expected for Germany and 9% historic RAB growth in Eastern Europe 3 Attractive growth opportunities 1 Based on distributed volume. 2 Regulated asset base. Numbers based on latest notification by regulator or based on calculations in latest filings with regulators. Expected increase in German regulated asset base calculated as RAB 2010/2011 plus net investments (post concession gains/losses) in regulated assets in the years 2010/2011 to 2015/2016E, assuming full recognition by the regulator. Generally, RABs from different regulatory regimes are not directly comparable due to significant methodological differences (e.g. regulatory periods, regulatory depreciation periods). Throughout this presentation, the RAB relevant for the 2015 tariff figure is used. Also, throughout this presentation, RABs are always stated excluding pro-rata share of RAB from participations that are not fully consolidated. 3 Historic increase in regulated asset base for Eastern European countries calculated as RAB relevant for tariff in 2015 vs. RAB relevant for tariff in 2011 (in at constant 2011 year-end exchange rates) for Czech Republic, Hungary and Poland. Growth rate excludes Slovakia as RAB was introduced in 2012 only and RAB will only be adjusted in next regulatory period starting 2017. Including FX effects, RAB would have increased by ~7%. innogy SE Sell Slide Brunch December 2016 2
Grid & Infrastructure A leading European distribution grid operator anchored in Germany Electricity Gas #1 electricity DSO in 13.3bn regulated asset base 1 Germany 3 +9% +9% increase expected for RAB 1 Germany increase 2011-15 for RAB 2 East #1 gas DSO Czech Republic 3 GER GER CZ HU PL SK Distributed volume (GWh) 142,000 73,000 66,500 16,800 7,200 3,700 Grid customers (m) 4 9.3 1.0 2.3 2.3 1.0 0.6 Grid area ( 000 km²) 92 35 46 20 0.5 16 Grid length ( 000 km) 5 356 47 65 67 17 22 RAB 1 9.7bn 1.6bn 0.9bn 0.7bn 0.5bn Country rating 6 AAA A1 Ba1 A2 A2 Note: all figures (except for RAB) as per 2015. Rounding differences may occur. 1 Regulated asset base. Numbers based on latest notification by regulator or based on calculations in latest filings with regulators. Expected increase in German regulated asset base calculated as RAB 2010/2011 plus net investments (post concession gains/losses) in regulated assets in the years 2010/2011 to 2015/2016E, assuming full recognition by the regulator. Generally, RABs from different regulatory regimes are not directly comparable due to significant methodological differences (e.g. regulatory periods, regulatory depreciation periods). Throughout this presentation, the RAB relevant for the 2015 tariff figure is used. Also, throughout this presentation, RABs are always stated excluding pro-rata share of RAB from participations that are not fully consolidated. 2 Historic increase in regulated asset base for Eastern countries calculated as RAB relevant for tariff in 2015 vs. RAB relevant for tariff in 2011 (in at constant 2011 year-end exchange rates) for Czech Republic, Hungary and Poland. Growth rate excludes Slovakia as RAB was introduced in 2012 only and RAB will only be adjusted in next regulatory period starting 2017. Including FX effects, RAB would have increased by ~7%. 3 Based on distributed volume. 4 Grid customers are defined as supplied delivery points. 5 Based on operated grid. 6 Source: Moody s. innogy SE Sell Slide Brunch December 2016 3 GER CZ PL SK HU
Grid & Infrastructure G&I with largely regulated and predictable earnings accounting for over 60% of innogy Group EBITDA G&I within innogy By regulated business By geography By area 4.5bn 17% 21% East ~30% Participations Other Fully consolidated 61% innogy EBITDA 2015 1 Share of regulated business >80% No. 1 electricity DSO in Germany² Germany ~70% 2015 EBITDA 2.9bn Grid Renewables Retail Grid & Infrastructure Strong track record of profitable growth in Eastern Europe High share of regulated business 1 Segment breakdown based on sum of operating segment ( 4.7bn). Total includes (0.2)bn presented as Other, consolidation in the combined financial statements. Numbers might not add up due to rounding differences. 2 In terms of distributed volume. As of 2015. innogy SE Sell Slide Brunch December 2016 4
Grid & Infrastructure Capex above depreciation resulting in RAB growth Development of regulatory asset base ( bn) +9% expected increase for 2010/11-2015/16 RAB Germany 2 +9% historic increase for 2011-2015 RAB East 3 Capex breakdown 2016-18E¹ East 25% RAB 2010/11 Cumulated regulatory depreciation Cumulated capex RAB 2015/16 Germany 75% Total ~ 4.1bn Capex continuously above regulatory depreciation over 2011-2015 Resulting RAB growth to support regulated profits Majority of capex will be invested in Germany, increasingly for Energiewende investments Eastern European capex used mainly for conventional grid expansion and new customer connections 1 Capex including financial investments. Includes non-grid capex. 2 Regulated asset base. Expected increase in German regulated asset base calculated as RAB 2010/2011 plus net investments (post concession gains/losses) in regulated assets in the years 2010/2011 to 2015/2016E, assuming full recognition by the regulator. 3 Historic increase in regulated asset base for Eastern European countries calculated as RAB relevant for tariff in 2015 vs. RAB relevant for tariff in 2011 (in at constant 2011 year-end exchange rates) for Czech Republic, Hungary and Poland. Growth rate excludes Slovakia as RAB was introduced in 2012 only and RAB will only be adjusted in next regulatory period starting 2017. Including FX effects, RAB would have increased by ~7%. innogy SE Sell Slide Brunch December 2016 5
Grid & Infrastructure Germany Germany #1 electricity DSO with strong market position in industrial centres Grid & participations overview innogy key statistics 9.7bn regulated asset base 1 Hamburg Hanover Berlin #1 electricity DSO in Germany 2 Electricity Gas Grid length ( 000 km) 5 356 47 Grid customers 6 9.3m 1.0m +9% increase expected for German RAB¹ Dortmund Essen Cologne Wiesbaden Frankfurt Mainz Chemnitz Dresden A leading gas DSO 3 Ranking of German electricity and gas DSOs 2 #1 Electricity Gas >10m grid customers Saarbruecken Stuttgart Augsburg Munich >100 municipal participations 4 #2 #3 Total DSOs (#) ~900 7 ~700 8 1 Numbers based on latest notification by regulator or based on calculations in latest filings with regulators. Expected increase in German regulated asset base calculated as RAB 2010/2011 plus net investments (post concession gains/losses) in regulated assets in the years 2010/2011 to 2015/2016E, assuming full recognition by the regulator. Throughout this presentation, RABs are always stated excluding pro-rata share of RAB from participations that are not fully consolidated. 2 Based on distributed volume. Source: RWE, E.ON, EnBW, EWE. Data as of 2015 (except for some EnBW-DSOs which are based on 2014). 3 Based on distributed volume. 4 Not fully consolidated municipal utilities. 5 Based on operated grid. 6 Grid customers are defined as supplied delivery points. 7 BNetzA, Monitoring report 2015. 8 Federal Ministry for Economic Affairs and Energy, website, as of 8 Jun 2016. innogy SE Sell Slide Brunch December 2016 6
Grid & Infrastructure Clear strategic imperatives efficiency and capitalising on regulatory expertise to drive earnings growth B Operational excellence A Regulatory management Exploit operational synergies from scale of business and bestpractice transfer C Business development Drive efficiency via further digitalisation and process optimisation Stable regulatory framework leads to predictable earnings Close interaction with regulators as proven way to prepare for regulatory change Optimised capex strategy for sustained earnings growth across markets Anticipate changing role of DSO and benefit from new business models Small-scale acquisitions innogy SE Sell Slide Brunch December 2016 7
A Grid & Infrastructure Germany High level of experience through long-term involvement in German regulation Timeline for electricity to be read as follows: in 2017, assessment of costs of year 2016 (base year) for benchmarking in 2018, beginning of 3 rd regulatory period in 2019 Gas and electricity with different timelines to relieve the process of cost assessment Incentive regulation 1 st period '06 '09 '10 '11 '12 '13 '14 '15 '16 '17 '18 '19 '20 '21 '22 '23 '24 Cost assessment for 2 nd period Efficiency benchmarking for 2 nd period Incentive regulation 2 nd period Cost assessment for 3 rd period Efficiency benchmarking for 3 rd period Incentive regulation 3 rd period Base year for the 1 st regulation period Beginning of incentive regulation Gas base year for the 3 rd regulation period Electricity base year for the 3 rd regulation period innogy SE Sell Slide Brunch December 2016 8
A Grid & Infrastructure Germany German incentive regulation provides for a predictable and stable remuneration framework Ex-ante revenue cap regulation Cost recognition based on DSO s actual cost base RAB remuneration determined for entire regulatory period No volume risk DSOs not impacted by fluctuations in demand Stable ex-ante framework codified by law, as opposed to ex-post supervision by regulator Revenue cap mechanically updated year by year mainly without regulatory discretion Cost recognition stable for 5-year regulatory periods Non controllable costs treated as pass-through in regulatory formula Inflation factor as effective macro hedge RAB split into 40% equity 1 and 60% debt by regulatory definition Return on regulatory equity fixed at nominal 9.05% (7.14% real for old assets) 2 for entire regulatory period until 2017/18 Cost of debt treated as pass-through and therefore allows for natural hedge against changes in interest rate environment Remuneration mechanisms for grid expansion Expansion factor included in revenue cap formula with 1-year time lag Investment measure mechanism recognised without time lag, established to support expansion of 110kV investments Note: figures based on current parameters may be subject to change. 1 Maximum value. 2 Returns before corporate tax, after trade tax. innogy SE Sell Slide Brunch December 2016 9
A Grid & Infrastructure Germany German grid business regulator determines framework for 3rd regulatory period Key changes to regulatory framework Return on equity: 6.91% / 5.12% for new/ old assets (was 9.05%/7.14%) Bonus for most efficient DSOs/ general productivity factor Elimination of time-lag for return on investments Increased transparency Further factors impacting G&I allowed returns Assessment of costs in base years 2015/2016 (gas/electricity) Efficiency benchmarking of DSO Timeline Main changes in regulatory framework only effective from 2018/2019 (gas/electricity) onwards Determination of general productivity factor expected in the course of 2017 innogy SE Sell Slide Brunch December 2016 10
A Grid & Infrastructure Germany Recent wave of concession renewals successfully accomplished more certainty Overview of concession renewals¹ 75% ~65% 50% 25% 9-12 years weighted average concession duration 2 innogy s existing concessions Concession-based RAB ~2/3 Non concession-based RAB 3 ~1/3 0% 2011-2015 2016E-2020E 2021E-2025E 2026E-2030E >2031E During the last 5 years (2011-2015), innogy has experienced a wave of concession renewal processes innogy has successfully renewed or transferred to grid participations approx. 90% of its expiring concessions over the last 5 years In case of lost concessions, forced grid sale still offers potential for attractive remuneration of current asset base and investments Fewer upcoming concession renewals in the mid-term Tender proceedings are based on quality factors innogy s advantages are, among others, relationship management in existing concession contracts and fast technical solutions Strong portfolio of ~3,800 concessions 4 Fully consolidated entities account for 94%, participations 5 for further 6% of total concessions ~1/3 of German RAB not based on concessions 3, thus providing further earnings stability 1 Concession renewals based on inhabitants supplied, taking into account exercise of early cancellation options. Chart indicates concessions up for renewal within respective time period, excluding water concessions. 2 Based on inhabitants supplied. 9-year weighted average takes early cancellation options into account. 12-year weighted average excl. early cancellation options. 3 Applies to high voltage, certain regional-based medium voltage grids as well as to high pressure gas grids. Based on 2010/11 RAB in Germany. 4 (revised) Including electricity, gas and water concessions, including consessions held by our grid participations. As of 30 June 2016. 5 Refers to grid participations for which an innogy entity is the grid operator innogy SE Sell Slide Brunch December 2016 11
B Grid & Infrastructure Germany G&I with superior operational performance and high quality assets supporting sustainable performance Cost benchmarking illustrates innogy s industry leading position Costs per high voltage grid length ( 000s/km) 1,2 Transparent maintenance and renewal strategy based on technically feasible lifetimes and relevant risk aspects Efficient and effective processes, e.g. automated workforce management Combined investment strategy addressing technical and regulatory perspectives Typical costs of a grid operator Exemplary split for innogy s Westnetz 3 Substations Connecting points Other Distribution lines 40.000 4.000 3.000 2.000 1.000 0 innogy entities Costs per substation ( 000s)¹ 1.200 innogy entities 1.000 800 600 400 200 0 Costs per connecting points ( )¹ Source: Polynomics AG, 2013. innogy grids, benchmarking of 130 grid operators Note: representative subset of 130 major grid operators (out of 196). Grid operators not participating in benchmarking mostly small grid operators. 1 Costs used in regulatory benchmarking process. Outliers graphically cropped. Average excluding outliers. 2 High voltage benchmarking relates to 110kV grids only. 3 Based on 2016E forecast data. median costs innogy SE Sell Slide Brunch December 2016 12 60 40 20 0 innogy entities
C Grid & Infrastructure Germany German Energiewende opens up significant growth opportunities for distribution grids Renewables have transformed the German energy landscape Installed capacity from renewables (GW)¹ 100 80 60 40 20 0 2000 2005 2010 2015 Hydro Wind onshore Wind offshore Solar PV Biomass Other 1 Source: AGEE/BMWi. 2 Source: BMUB, BMWI. 3 Source: European Commission. Excluding pump storage hydro generation. driven by a strong political will to decarbonise the economy 2 25% 1.5% 40% 80% Thermal electricity generation from CHP in 2020 Annual decrease in total energy consumption from 2014 to 2020 Reduction of greenhouse gas emissions until 2020 (compared to 1990) Share of electricity demand to be covered by renewables until 2050 which will continue to drive the expansion of renewables 11 CAGR 5.7% 180 2000 2050 Total RES capacity installed (GW)³ innogy SE Sell Slide Brunch December 2016 13
C Grid & Infrastructure Germany Energiewende mainly takes place at DSO level 25 largest network operators in terms of integrated decentral RES capacity¹ Installed capacity (GW) 9 8 7 6 5 4 3 2 1 0 100% 80% 60% 40% 20% 0% Cumulated share innogy companies Other Cumulated share In total, 90% 2 of RES capacity is connected to the distribution grid in Germany With continued growth in RES capacities, DSOs will play a central role in integrating and coordinating the transition towards renewables innogy is well positioned and at the forefront of this development already among the leading integrators of installed decentral RES capacity 1 Source: EnergyMap.info; largest German network operators in terms of integrated decentral RES capacity as of August 2015. 2 Source: Verteilernetzstudie BMWi innogy SE Sell Slide Brunch December 2016 14
C Grid & Infrastructure Germany Increased focus on Energiewende investments reflected in capex spend Capex breakdown¹ 2016-18E total capex G&I Germany ~ 3.1bn 1 Non-grid capex 18% 3 Replacement 34% Replacement Optimisation of existing distribution grid through smart replacement capex Increases operational efficiency and reduces O&M costs Other grid capex 13% 2 Energiewende investments Integration of renewables capacity Smart technology driven by digitalisation Innovative solutions for grid expansion Energiewende investments 16% Customer connections 19% Customer connections New customer connections ~ 3.1bn of investments 2016-18E will continue to support growth in Germany 1 Capex including financial investments. 2 Other grid capex includes investment for non-regulated grid assets such as street lighting, broadband or telco activities. 3 Non-grid capex comprises of capex for innogy s German storage facilities, shares of investment spend related to participations as well as capex for other activities, such as innogy s water business. innogy SE Sell Slide Brunch December 2016 15
Grid & Infrastructure Germany Participations strategic partnerships with municipal utilities as key competitive advantage Participations as integral component of G&I Partnerships mainly with municipal utilities extend innogy s regional coverage across Germany Participations provide regional identification and customer proximity Strategic advantage for innogy also in minority participations through its frequent role as service provider Synergies in the area of testing, developing and rolling out new business models Best practices and economies of scale in areas such as procurement, risk management and other >100 municipal participations 1 Selected municipal participations 2 Participation innogy share 2 Income from investments 3 20% 27 40% 15 50% 12 43% 7 27% 7 Note: largest participations by contribution to G&I income from investments (adjusting for income/losses from loans to other group entities, gains/losses from sale of investments and other components). 1 Not fully consolidated regional or municipal utilities. 2 As per innogy s combined financial statements. Top municipal 5 participations based on at-equity income contributions shown. Does not include Austrian Kelag with income from investments of 32m. 3 In FY2015. innogy SE Sell Slide Brunch December 2016 16
Grid & Infrastructure Germany/East Other business supplemental utility businesses strengthening local footprint Indicative split of 0.3bn G&I EBITDA 2015A from Other Gas storage Water supply TelCo, service and other activities Generation 4.3bcm working gas volume 1 ~75m m³ water supplied in 2015 (RWW) 3 TelCo service provider ~800GWh LEW electricity production from renewables 5 11 facilities in Germany and Czech Republic Some subsidiaries providing wide range of B2B/B2C TelCo products and services Robust cash margins 2 ~3,000km grid length 4 Other services ~800 MW installed capacity Conventional Generation 6 Modern, cost-efficient storage facilities Energy data management and services facility management, street lighting 1 As of 30 Jun 2016. 2 RWE Gasspeicher benchmarking, estimates based on publicly available data and market intelligence. Excluding storage facility for which closure has been initiated. 3 innogy has other minor water supply business activities beside RWW. 4 Source: Umwelterklärung RWW 2015. 5 Source: company information, as per Annual Report 2015. 6 Source: company information. For fiscal year 2015. Revised. Coal, gas and oil. innogy SE Sell Slide Brunch December 2016 17
A Grid & Infrastructure East East regulation across countries with near-term stability of regulatory parameters Regulatory model overview Transparent regulatory framework Close interaction with regulators based on years of trust and reliability Similar formulae for regulated revenues/prices in all four countries Stable returns from RAB For 2/3 of East RAB (CZ and PL) expected until 2018 and 2020 respectively due to both regulatory periods beginning in 2016 For 1/3 of East RAB (SK/HU) trustful consultations ongoing on new regulatory period starting 2017 Regulatory period overview CZ 2016-2018 HU 2017-2020 PL 2016-2020 SK 2017-2021 2015 2017 2019 2021 Electricity distribution Gas distribution Largest RABs in stable countries Broadly similar regulation systems Overlapping regulatory periods provide stability innogy SE Sell Slide Brunch December 2016 18
B Grid & Infrastructure East Operational excellence reflected in continuous improvement of quality of distribution Improving grid performance 1 SAIDI (min) 2 SAIFI 3 157 2.15 126 2012 2015 2010 2015 SK 4 HU 5 1.72 1.19 1.02 2012 2015 2010 2015 SK 4 HU 5 73 63 driven by focus on modernisation investments Slovakia: significantly improved quality of supply Result of considerable increase in investment volume Replacement of critical assets and grid renewal After roll-out of high voltage grid automation, ongoing roll-out in medium voltage space Shorter response times in case of outages by introduction of modern workforce management system Regulator is monitoring various quality standards, customers are automatically compensated by DSO if not keeping a quality standard Hungary: DSO improvement measures Intelligent medium voltage/low voltage stations Grid automation solutions Upgrade of IT solutions: mobile workforce management, supervisory control and data acquisition system, condition-based maintenance strategy and advanced geographical information systems Investment strategy incentivised by bonus/malus system Source: innogy company information. 1 Quality parameters among countries not directly comparable due to different grid structures and technical conditions. 2 System average interruption duration index is a reliability indicator of average outage duration for each customer served, measured in minutes per annum. 3 System average interruption frequency index is a reliability indicator of average numbers of interruptions per year. 4 Comparable methodology starting from 2012. As per innogy company information. 5 Metrics presented related to ELMÚ. innogy SE Sell Slide Brunch December 2016 19
C Grid & Infrastructure East Future investments in East mainly driven by replacement and customer connections Capex breakdown¹ 2016-18E total capex G&I East~ 1.0bn 1 Non-grid capex Other grid capex 3 6% 2 5% Energiewende investments 4 1% Customer connections 17% Replacement 70% Replacement Customer connections Optimisation of existing grid Modernisation of stations and gas pipelines; construction of cables and overhead lines on all voltage levels Increases operational efficiency and reduces O&M costs Growth in connection numbers driven by underlying macro factors (population, energy demand) Mostly customers from existing grid; new lines where load demand exceeds current capacity Connections of renewables so far less pronounced, but growth foreseeable in the future ~ 1.0bn of investments 2016-18E will continue to drive growth in innogy s Eastern markets 1 Capex including financial investments. 2 Non-grid capex contains investments in storage, overhead (e.g. renewal of buildings, IT investments) and other. 3 Other grid capex primarily includes IT investments or third party capex. 4 Mainly relates to smart meter investments. Other Primarily IT hardware and software Third party driven investments rebuilding existing grid routes or cabling overhead lines to free the ground innogy SE Sell Slide Brunch December 2016 20
Grid & Infrastructure Grid & Infrastructure key takeaways 1 A leading European distribution grid operator 13.3bn RAB¹ 9% RAB increase¹ expected for Germany 9% RAB increase 2 expected for Germany 2 Predictable, regulated earnings contribution secured by stable regulatory frameworks 9.05% 3 until 2017/18 return on equity for current regulatory period in Germany ~6.5% 4 pro-forma WACC Eastern European countries 3 Highly efficient operations with excellent network reliability ~97% efficiency factor in Germany Continuous optimisation 4 5 Investment opportunities from renewables expansion Further growth through dedicated investments as key driver for regulated profit growth Among the leading RES-integrators in Germany ~ 4.1bn 2016-18E G&I capex 5 1 Regulated asset base. Numbers based on latest notification by regulator or based on calculations in latest filings with regulators. Expected increase in German regulated asset base calculated as RAB 2010/2011 plus net investments (post concession gains/losses) in regulated assets in the years 2010/2011 to 2015/2016E, assuming full recognition by the regulator. Generally, RABs from different regulatory regimes are not directly comparable due to significant methodological differences (e.g. regulatory periods, regulatory depreciation periods). Throughout this presentation, the RAB relevant for the 2015 tariff figure is used. Also, throughout this presentation, RABs are always stated excluding pro-rata share of RAB from participations that are not fully consolidated. 2 Historic increase in regulated asset base for Eastern countries calculated as RAB relevant for tariff in 2015 vs. RAB relevant for tariff in 2011 (in at constant 2011 year-end exchange rates) for Czech Republic, Hungary and Poland. Growth rate excludes Slovakia as RAB was introduced in 2012 only and RAB will only be adjusted in next regulatory period starting 2017. Including FX effects, RAB would have increased by ~7%. 3 Nominal return on equity on existing RAB until 2017/18 according to German ARegV for new assets (post 2005); 7.14% real for old assets (pre 2006); stated returns pre corporate tax. Return on equity to change to 6.91% for new assets and 5.12% for old assets in the next regulatory period. 4 Pro-forma RAB-weighted average WACC of CZ, HU, PL and SK. SK RAB only included for 4 months due to first-time consolidation of VSE in 2015. 5 Including financials investments. innogy SE Sell Slide Brunch December 2016 21