RWE Credit Day 2006 RWE s Commodity Risk Management Hans Bünting Vice President Group Risk Management RWE AG London, July 6, 2006
RWE s Commodity Risk Hedging Principles [1/2] As a matter of principle, liquid risks of the generation companies RWE Power and RWE npower (generation) are transferred to RWE Trading. Liquidity is defined by observed trading volumes on the markets. The downstream companies RWE Energy and RWE npower (retail) hedge their exposure back-to-back with RWE Trading. RWE Trading manages liquid commodity risks within a clearly defined limit structure, overseen by the Risk Committee. Positions are managed jointly with proprietary trading books, thus enabling RWE Trading to manage its overall risk position without frictions. 2
RWE s Commodity Risk Hedging Principles [2/2] The benchmark for all transactions between RWE Trading and the other Group companies are market prices. This ensures that no sales contract is concluded below the wholesale benchmark. In the short-term window, all of the Group s commodity positions including fuels are pooled in one central unit: Short Term Position Management (STPM). This ensures the optimal dispatch of the generation assets, and the optimal use of optionality and flexibility in contracts with suppliers and customers. 3
The Net Position Requires Efficient Commodity Risk Management and the Group structure supports it:* RWE npower RWE Power RWE Trading RWE Energy RWE npower Upstream Upstream Downstream Downstream Generation 33 bn kwh Generation 183 bn kwh Power supply 151 bn kwh Power supply 55 bn kwh Oil exploration 29 m bbl Gas exploration 2.4 bn cbm Gas supply 289 bn kwh Gas supply 48 bn kwh * Numbers as of December 31, 2005 4
The Central Role of Trading has Evolved Over Time RWE Trading provides the integral link between generation and supply as a wholesale platform. RWE Trading pools commodity risks for the RWE Group in liquid markets. Pure spec trader Provider of market information/ route to the wholesale markets Best practice blueprint for risk control Integrated wholesale risk pool and portfolio manager Joint shortterm trading and asset dispatch function STPM* 1998 2000 2002 2003 2005 ff. * Short Term Position Management 5
RWE Trading = Group s Wholesale Risk Pool and Portfolio Manager in Germany Embedded Lignite supply Buys gas Long-term gas supply contracts Emissions Trading World coal market Wholesale power markets RWE Power RWE Trading RWE Energy Industrial Long-term asset management Hedges with standard instruments Internal market maker as regards retail for load profiles/shape Hedges fuels and CO 2 for power sold Sells standard forward products Buys CO 2 certificates Buys standard forward products from RWE Power Manages risk within defined limits Internal market maker for fuels and CO 2 Buys power Sells power Sells to customers Buys back-to-back Locks in sales margin Bears volume and credit risk Sells power SMEs Municipalities Residential Transfers day-ahead position Transfer of generation capacity incl. fuels and CO 2 RWE STPM* Cont Load profile Short-term/spot market (< 2 months) Buys and sells Manages RWE s short-term position (< 2 months) on the Continent, including power plant dispatch, fuels, and retail load Sells capacity and services Balancing market * Short Term Position Management 6
and the UK Emissions Trading World coal market Wholesale gas market Buys and sells Wholesale power market RWE npower Generation RWE Trading RWE npower Retail Industrial Long-term asset management Hedges CO 2 for capability not yet transferred to Trading Transfer of capability incl. CO 2 Buys CO 2 certificates Buys capability from RWE npower Manages the spread option within defined limits Internal market maker for power, fuels and CO 2 Buys power Sells power Sells to customers Buys back-to-back Locks in sales margin Bears volume and credit risk Sells power SMEs Residential Option exercise RWE STPM* UK Load profile When an option is exercised, STPM* manages generation capability until production (< 1 week) Spot market (< 1 week) Buys and sells Manages optionality of plants (dispatch including fuels), and retail load Sells capacity and services Balancing market * Short Term Position Management 7
Commodity Risk Governance Structure RWE Group Center RWE AG Executive Board Group Risk Management Group Business Committee Market Committee Risk Committee New Product Team Market Assessment Team ABC Gas & Oil ABC Continent ABC UK Carbon Working Group RWE Energy RWE Power RWE Trading RWE npower Retail Portfolio Mgmt. Asset Mgmt. Trading Desks Retail Portfolio Mgmt. Asset Interface Asset Mgmt. Short Term Position Management (Continent) Short Term Position Management (UK) Risk Control Risk Control Risk Control Risk Control 8
Governance and Control Framework RWE AG Harry Roels CEO Klaus Sturany CFO & Risk Committee (Chairman) Berthold Bonekamp Alwin Fitting Hans Bünting Group Risk Management Jan Zilius Georg Lambertz Group Finance RWE AG Risk Committee RWE Power AG CFO RWE Energy AG CFO RWE Trading GmbH CFO RWE npower Plc. CFO RWE Operating Companies 9
Actual Market Prices 10
Actual Market Prices /1 Power Germany Baseload 63 60 57 54 51 48 45 42 39 36 33 30 11 Jan-06 Feb-06 Mar-06 Apr-06 May-06 Jun-06 Jan-04 Feb-04 Mar-04 Apr-04 May-04 Jun-04 Jul-04 Aug-04 Sep-04 Oct-04 Nov-04 Dec-04 Jan-05 Feb-05 Mar-05 Apr-05 May-05 Jun-05 Jul-05 Aug-05 Sep-05 Oct-05 Nov-05 Dec-05 EUR/MWh Cal 06 Cal 07 Cal 08
Actual Market Prices /2 Clean Dark Spread Germany 24 21 18 15 12 9 6 3 0-3 -6-9 12 EUR/MWh Jan-05 Feb-05 Mar-05 Apr-05 May-05 Jun-05 Jul-05 Aug-05 Sep-05 Oct-05 Nov-05 Dec-05 Jan-06 Feb-06 Mar-06 Apr-06 May-06 Jun-06 Cal 07 Cal 08
Actual Market Prices /3 Close Correlation between German Power Baseload Cal 07 and Carbon prices still observable, but on a higher Dark Spread level Power Baseload BL Cal 07, Cal /MWh 07, /MWh 65 60 55 50 45 40 Q1-Q3 2005 Q4 2005 Q1 2006 Q2 2006 y = 0.85x + 39.14 y = 1.09x + 25.75 y = 0.44x + 30.68 35 30 5 10 15 20 25 30 35 EUA07, /t * European Allowances 2007 * 13
Actual Market Prices /4 Clean Dark Spread UK 35 32 29 26 23 20 17 14 11 8 5 14 GBP/MWh Jan-05 Feb-05 Mar-05 Apr-05 May-05 Jun-05 Jul-05 Aug-05 Sep-05 Oct-05 Nov-05 Dec-05 Jan-06 Feb-06 Mar-06 Apr-06 May-06 Jun-06 Cal 07 Cal 08
Actual Market Prices /5 EU Allowances 2006 and 2008 35 32 29 26 23 20 17 14 11 8 5 15 Jan-05 Feb-05 Mar-05 Apr-05 May-05 Jun-05 Jul-05 Aug-05 Sep-05 Oct-05 Nov-05 Dec-05 Jan-06 EUR/ t CO2 Feb-06 Mar-06 Apr-06 May-06 Jun-06 Cal 06 Cal 08