Heat Staying Warm. Anders Östlund Senior Vice President Heat and Waste. E.ON Capital Market Day Nordic Stockholm, July 3, 2006

Transcription

1 Heat Staying Warm Anders Östlund Senior Vice President Heat and Waste E.ON Capital Market Day Nordic Stockholm, July 3, 2006

2 Agenda Business Model and the Nordic Heat Market The Heat Business within E.ON Sverige Strong Future in the Heat Business Conclusions Page 2

3 Heat A stable business with many possibilities Electricity Heat forward (hot water) Return (cold water) Delivery of heated water through a pipe system, District Heating (DH). The customer pays a fixed fee and a volume based price. The competitiveness is based on low production costs supported by the possibilities to produce power (CHP) and to burn waste. Expensive to establish district heating especially in less populated areas. Page 3

4 District Heating has a strong position in the heat market Different heat solutions compete. The DH-price is based on the price level for substitutes. Low driving force to change heating solution, especially from DH. Extensive investments are needed for such a change. Normally only one district heating supplier in each city. Technical monopoly. The heat market in Sweden is not under any specific legislation today. A government investigation has signalled that there is a need to strengthen the customers position against suppliers. A proposal focusing on increased transparency and possibility to negotiate and complain is expected within this year. Page 4

5 Large potential for heat market consolidation Norway Nearly all heating is electricity based and individual. District heating (DH) is available in Oslo 1 TWh. Growing interest in DH. Volume of DH: 2 TWh Finland Fragmented market, more than 200 suppliers. Approx. 90% are municipally ownded (applies to volume and number of suppliers). Nearly all companies with customer relations have own production. Volume of DH: 30 TWh Denmark Fragmented market with 402 heat suppliers, 48 are owned by municipalities, 300 suppliers have own generation. The municipality reform creates an opportunity for acquisitions. Volume of DH: 33 TWh Sweden Fragmented market with 225 DH systems. Municipalities own 155 of DH systems. Volume of DH: 50 TWh Page 5

6 Agenda Business Model and the Nordic Heat Market The Heat Business within E.ON Sverige Strong future in the Heat Business Conclusions Page 6

7 Heat Market in Sweden 2005 District heating, gas, oil, pellets, heat pumps approximately 100 TWh District heating supplies approximately 50 TWh E.ON s district heating supplies 6.4 TWh Page 7

8 E.ON Nordic heat strategy built on two successful models Size 1 Large District Heating (DH) and connected large-scale CHP 4.2 TWh heat and 0.7 TWh electricity Small-scale (DH) and decentralized heat plants, i.e. TotalHeat (TH) 2.2 TWh heat and 0.1 TWh electricity Profitability Operating EBIT margin 15-30% Operating EBIT margin 7-12% Strategic rationale Fragmented and growing market Good position and reputation for future development, #2 in Sweden High flexibility for supply of heat Growing market E.ON is the market leader in Sweden Value to other business 1 The size of the business represents sold volumes during Page 8

9 Heat Large and small-scale business Supply approximately 40 district heating networks Hede Sveg Vilhelmina Dorotea Vännäs Ramsele Nordmaling Långsele Sollefteå Bollstabruk Timrå Roughly 800 facilities Around 30,000 customer connections Orsa Mora Skinnskatteberg District heating District cooling Co-generation Energy recovery Mölnlycke/Kullbäckstorp/Landvetter Kungsbacka Åmål Lammhult Lagan Ljungby Älmhult Markaryd Ryd Perstorp Broby Malmö Staffanstorp Bara Nora Vallentuna/Vaxholm/Österåker Örebro/Hallsberg/Kumla/Odensbacken Trosa Norrköping Söderköping Åseda Bålsta/Bro/Kungsängen/Järfälla Mönsterås Kalmar Page 9

10 Proportion between customers and volume in Sweden Numbers of customer connections Total number 30,000 Volume 6.4 TWh Small Houses 68% (20,400) Apartments 32% (9,000) Small Houses 5% 0.32 TWh Apartments 95% 6.08 TWh Page 10

11 Earnings trend in the heat segment (I) Sweden, Denmark and Poland million Adjusted EBIT Swedish GAAP Page 11

12 Earnings trend in the heat segment (II) Sweden, Denmark and Poland million ROCE % Average capital employed 1 Return on capital employed Swedish GAAP Page 12

13 We shall set the example in heating and cooling Supplied heat (GWh) Increase profitability in existing plants and businesses Restricted growth core business strategy Strengthen customer relations Operational excellence Profitable growth Strengthen confidence among customers, politicians and owners Expansion Consolidation Profitable growth Page 13

14 Still going forward and growing GWh District heating Total heat Poland, Denmark Page 14

15 Biomass is the most important fuel source in Sweden heat business Fuel types for DH 1 Share of DH costs Future developments LPG 2% Peat 3% Oil 6% Others 2% Coal 2% Electricity 5% Waste 8% Fuel incl. Production taxes 51% ( million) The fuel mix will stay balanced. Old boilers will eventually be replaced with both biomass and natural gas. Natural gas 16% New investments in biomass plants planned. Biomass 56% ~6,4 TWh ~ 304 million Personal, operating and maintenance 34% ( 104 million) Depreciations 15% ( 45 million) The growth in Sweden will mainly be based on biomass during the period E.ON Sverige is likely to remain the largest user of biomass in Sweden figures Page 15

16 Agenda Business Model and the Nordic Heat Market The Heat Business within E.ON Sverige Strong future in the Heat Business Conclusions Page 16

17 Strong competitiveness Extremely strong and long-term relationships with customers if district heating supplier takes a responsible approach. Low costs result in competitiveness compared with alternatives. Multi-pillar businesses - heat, power, waste treatment generate unique advantages. New and improved small-scale solutions increase competition. Page 17

18 Positive political acceptance Generally positive attitude towards district heating since it has strongly contributed to the reduction of pollution from the heat sector. Renewable fuels and incineration of waste. Co-generated heat and use of industrial waste heat. Contributes to energy efficiency. Risk of regulation if the industry mismanages itself. Third party access cannot be ruled out. Page 18

19 Market and opportunities Fragmented market that will consolidate further. Total Heat concept, relatively untapped market and low level of competition. Co-generated heat is being promoted by politicians large, untapped potential. Page 19

20 Agenda Business Model and the Nordic Heat Market The Heat Business within E.ON Sverige Strong future in the Heat Business Conclusions Page 20

21 Conclusions Strong future in the heat business Competitive product in a long term sustainable market. Positive financial trend Growth potential, organically and M&A Main challenges for E.ON Operational excellence Profitable growth Strengthen confidence among customers, politicians and owners. Page 21

22 This presentation do not constitute an invitation to sell or an offer to buy any securities or a solicitation of any vote or approval. Endesa investors and security holders are urged to read the tender offer prospectus from E.ON regarding the proposed tender offer for Endesa when it becomes available, because it will contain important information. The tender offer prospectus and certain complementary documentation will be filed in Spain with the Spanish Comisión Nacional del Mercado de Valores (the CNMV ). Likewise, a tender offer statement, which will incorporate the prospectus by reference, will be filed in the United States with the U.S. Securities and Exchange Commission (the SEC ). Investors and security holders may obtain a free copy of the tender offer prospectus (when it is available) and its complementary documentation in the central offices of E.ON, Endesa, the four Spanish Stock Exchanges, and Santander Investment Bolsa SV SA. The prospectus will also be available on the websites of the CNMV ( and E.ON ( Likewise, investors and security holders may obtain a free copy of the U.S. tender offer statement (when it is available) and other documents filed by E.ON with the SEC on the SEC s web site at The tender offer statement and these other documents may also be obtained for free from E.ON, when they become available, by directing a request to E.ON AG, External Communications, phone This presentation may contain forward-looking statements. Various known and unknown risks, uncertainties and other factors could lead to material differences between the actual future results, financial situation, development or performance of E.ON and Endesa and the estimates given here. These factors include the inability to obtain necessary regulatory approvals or to obtain them on acceptable terms; the inability to integrate successfully Endesa within the E.ON Group or to realize synergies from such integration; costs related to the acquisition of Endesa; the economic environment of the industries in which E.ON and Endesa operate; and other risk factors discussed in E.ON s public reports filed with the Frankfurt Stock Exchange and with the SEC (including E.ON s Annual Report on Form 20-F) and in Endesa s public reports filed with the CNMV and with the SEC (including Endesa s Annual Report on Form 20-F). E.ON assumes no liability whatsoever to update these forward-looking statements or to conform them to future events or developments. E.ON prepares its consolidated financial statements in accordance with generally accepted accounting principles in the United States ("U.S. GAAP"). This presentation may contain references to certain financial measures (including forward looking measures) that are not calculated in accordance with U.S. GAAP and are therefore considered "non-gaap financial measures" within the meaning of the U.S. federal securities laws. E.ON presents a reconciliation of these non-gaap financial measures to the most comparable U.S. GAAP measure or target, either in this presentation, in its Annual Report, or on its website at Management believes that the non-gaap financial measures used by E.ON, when considered in conjunction with (but not in lieu of) other measures that are computed in U.S. GAAP, enhance an understanding of E.ON's results of operations. A number of these non-gaap financial measures are also commonly used by securities analysts, credit rating agencies, and investors to evaluate and compare the periodic and future operating performance and value of E.ON and other companies with which E.ON competes. These non-gaap financial measures should not be considered in isolation as a measure of E.ON's profitability or liquidity, and should be considered in addition to, rather than as a substitute for, net income, cash flow provided by operating activities, and the other income or cash flow data prepared in accordance with U.S. GAAP. The non-gaap financial measures used by E.ON may differ from, and not be comparable to, similarly titled measures used by other companies. Page 22