RWE Deutschland strong value driver and additional growth potential

RWE Deutschland strong value driver and additional growth potential

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 judgment 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 forward-looking 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 most recent reports filed with Frankfurt Stock Exchange and to all additional information published on RWE s Internet Web site RWE Deutschland AG May 2015 Page 2

RWE Deutschland Overview Important contributor to RWE Group: distribution and supply businesses are essential value drivers Downstream business Earnings contribution to RWE Group Distribution Supply 47% RWE Deutschland Value drivers Operating result 2014: 4.0bn Of which circa 70% regulated» Regulatory management» Asset mgmt. of RAB 1» O&M costs» Sales margin» Customer base» Operating costs» Selective growth investments Strong and stable earnings contribution with additional growth potential. 1 RAB = Regulated Asset Base RWE Deutschland AG May 2015 Page 3

RWE Deutschland Overview RWE Deutschland: A leading energy supply company in the German market Dr. Arndt Neuhaus CEO Bernd Böddeling Finance Dr. Heinz-Willi Mölders Human Resources Dr. Joachim Schneider Grid Engineering Essen Market position Germany Electricity supply No. 1 Gas supply No. 3 Key figures 2014 RWE Deutschland Group External revenue 25.3 Euro billion EBITDA 2.7 Euro billion Operating result 1.9 Euro billion Investments 1.0 Euro billion Employees 18,400 Full-time equivalent (FTE) End customers 8 million Electricity distributed 1 150 TWh Gas distributed 1 90 TWh Grid length electricity 330,000 km Grid length gas 48,000 km 1 2013 figures RWE Deutschland AG May 2015 Page 4

RWE Deutschland Overview Continuous growth of operating result in the past and in future Review operating result in m 1 Forecast 2015 1,046 ~ 5% p.a. 1,871 Operating result moderately below previous year High earnings from the disposal of grid assets in 2014 Higher costs to improve the quality of our grid + Normalised weather conditions assumed 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 Annual growth rate of about 5% from 2003 to 2014 Long-term + + Cost reduction through efficiency programmes Increase of margin in supply business Negative effect of regulation in network business + + Stable income situation due to stable regulatory situation for this and the next regulatory period (until 2018) Growth opportunities through efficiency improvements and smart energy systems provide low single digit annual growth potential 1 Pro forma figures for current organisational structure RWE Deutschland AG May 2015 Page 5

RWE Deutschland Overview German Energiewende offers distinct growth opportunities with scalable investments Political targets/market trends» Ambitious political targets until 2020 25% of total electricity generation from CHP 1.5% p.a. decrease in total energy consumption (2014 2020) 40% reduction of greenhouse gas emissions (compared to 1990) 35% of electricity demand covered by renewables» Financial support for decentralised energy system» Growth in PV and wind capacity» Electricity as efficient energy source Growth opportunities Distribution (smart grids)» Smart regulated investments Sales (smart markets)» Investments in decentralised CHP/energy services» Energy efficiency products» Management of virtual power plants/ decentralised energy systems» Electricity as efficient substitute for other energy sources offers general growth perspective» Core business as a combination of technology and sales to provide robust value contribution» Successful products to be transferred to other RWE markets RWE Deutschland AG May 2015 Page 6

RWE Deutschland Distribution Solid distribution network business RWE Deutschland group owns 330,000 km electricity and 48,000 km gas distribution grids. Operation of local distribution grid (low and medium voltage) via concessions from individual municipalities. Municipalities assign these concessions for electricity, gas, water and distant heating. In return they receive a regulated concession fee. We supply electricity, gas and/or water to almost every fourth German municipality. Supply is located in regions with high population density and industrial growth RWE Deutschland AG May 2015 Page 7

RWE Deutschland Distribution Regulatory management: Negotiations with German regulator serve solid framework until 2018 Deduction resulting from the cost reviews Revenue cap Key revenue drivers 1 Cost reviews: elimination of elements unique to the baseline year 1 Costs not influenced by DSO 4 2 3 Determination of the efficiency figure: based on total cost benchmarking against other grid operators Annual adjustment of costs that can be influenced: Consumer Price Index minus x factor (CPI-X) and the expansion factor for the integration of renewables, among other things 2011 costs Costs influenced by DSO 2 3 4 Annual adjustment of costs that can not be influenced: e.g. upstream grid/avoided grid fees, investment measures, incidental staff costs Results from 2013 negotiations Second regulatory period for electricity (2014-18) secured with a solid cost base and a good efficiency 2011 Electricity baseline year 2014 2018 2 nd electricity regulation period Further potential for revenue growth by the recognition of costs for the integration of renewables RWE Deutschland AG May 2015 Page 8

RWE Deutschland Distribution Financial performance of distribution grid business oriented to highest European benchmarks RWE s target setting on regulatory outperformance 3 Outperformance target Outperformance target WACC [%] (regulatory conceded) Return on RAB [%] WACC [%] (regulatory conceded) Return on RAB [%] RWE RWE European comparables European comparables» Strategic return on RAB 1 goals for RWE distribution business based on ambitious outperformance target» Outperformance target derived from European competitor analysis» Country-specific regulatory WACC 2 adjusted for different regulatory regimes» Outperformance achieved by operative and regulatory management Target achieved for regulatory period until 2012/13 1 RAB = Regulated asset base 2 WACC = Weighted average cost of capital 3 Outperformance = Return on RAB minus WACC RWE Deutschland AG May 2015 Page 9

RWE Deutschland Distribution Our investment strategy yields high performance grid EXAMPLE: Typical grid area Outperformance target Grid length 220 km No. of mid voltage fields 76 Degree of cabling 60% Optimisation (investments, operation, O&M costs) WACC [%] (regulatory conceded) 200 km Grid length 56 No. of mid voltage fields 90% Degree of cabling 110/10-kV-Station 10/0,4-kV-Station Brücke 10-kV-Kabel/ Freileitung 110/10-kV- substation 10/0,4-kV-substation Bridge 10-kV-cable/overhead line 1 km Grid topology before investment Grid topology after investment Investment and maintenance strategy: Specific investments reduce long-term CAPEX for the grid and optimise O&M costs RWE Deutschland AG May 2015 Page 10

RWE Deutschland Distribution Smart grids: Smart solutions for profitable investments RWE Deutschland AG May 2015 Page 11

RWE Deutschland Distribution Future oriented development of energy infrastructure the technological world premiere RWE s targets on Ampacity Explore new technology to meet future demand Technical illustration Optimize power supply in large metropolitan areas (high energy density) by eliminating the 110/10 kv substations Use the advantages of superconductivity: > Virtually lossless electricity transport > Reduced space requirements for systems and lines > Cost efficiency by reduced installation costs > Opportunities for new "smart" network structures in metropolitan area Cost savings through innovative technologies RWE Deutschland AG May 2015 Page 12

RWE Deutschland Supply Strong market position in German supply market: No. 1 in electricity and gas sales to households Household Market position» 16% market share in electricity» 10% market share in natural gas» RWE could retain customers more successfully than competitors Strategic aspiration» Increase of revenue and operating results per customer due to differentiated products/services and the continuous utilisation of crossselling potentials Business» 13% market share in electricity» 10% market share in natural gas» Value-oriented customer service, growth beyond pure commodity sales Utilities/resellers» 12% market share in electricity 1» 6% market share in natural gas 1» Be excellent in customer care and market oriented products 1 Supply volume in relation to total consumption in Germany RWE Deutschland AG May 2015 Page 13

RWE Deutschland Supply Profitable customer base maintained in spite of intensive competition and high churn rates Development of household electricity prices 1 is driven by increased taxes and levies Taxes and levies Generation, grid, sales [Start of liberalisation in 1998 = 100] 168 109 52% 40% 2005 2014 Value-oriented development of house-hold customer base (electricity/gas) [In millions] 4 7.3 7.4 Intense competition (more than 1,300 suppliers) shown by accumulated churn rate of households 2 [In %] 7 21 36 2005 2009 2014 3 2012 2014 Key success factors» Best in class customer service and online offers» Advanced customer insight management» Acquisition skills via most successful German discounter brand» Brand management and marketing campaigns to increase loyalty/credibility 1 Source: BDEW; status March 2015 average three-person household with 3,500 kwh/a 2 Source: BDEW-Kundenfokus, BDEW-Energietrends 3 Source: BDEW: Wechselverhalten im Energiemarkt 2014, Status October 2014 4 Status December 2014, 2012 excl. Kevag RWE Deutschland AG May 2015 Page 14

RWE Deutschland Supply German household segment in an excellent value driver position Margin and cost analysis indicates our excellent performance compared to our competitors Sales margins EXAMPLE: Tariff customers electricity % above average RWE Large Utilities Small/Medium Utilities Average margin» RWE margins for tariff customers (household and small commercial) for electricity and gas are among the highest in Germany» To maintain margin level and low churn rates, value-oriented retention schemes are set up Customer base EXAMPLE: Average customer electricity demand kwh/a 3,200 Average 3,300 RWE Company» Average demand per household and small commercial customer in Germany is 3,200 kwh/a» RWE household and small commercial customers with 3,300 kwh/a above average» Together with high sales margins RWE Deutschland has most attractive customer base Operative costs EXAMPLE: Customer service costs % above average +80% -40% Average costs» Service costs benchmarked regularly» 22% of the German household customers are considered in the benchmark» RWE is at average cost level with further improvement potential RWE RWE Deutschland AG May 2015 Page 15

RWE Deutschland Supply Growth in the supply business based on customer oriented innovation Focus on key drivers to realise added growth Customer access, competence, innovative products as key success factors Customer access to approx. 8 million customers, number one in electricity retail sales in Germany, leading in B2B sales Advanced customer service (numerous awards) Successful use of new distribution channels like internet Technical and sales competence e.g. by setting technical standards like in e-mobility and smart meter First new innovative products already launched: RWE SmartHome, Power-to-Heat, RWE HomePower Storage, RWE Home Power Solar, etc.; other products in development Increase of margin per customer aspired RWE Deutschland AG May 2015 Page 16

RWE Deutschland Supply RWE Smart Home : Combining energy efficiency and convenience RWE Smart Home successful product launch with more than 710,000 devices sold Development of device sales 1 (in thousand) 800 600 400 200 0 1.12 6.12 1.13 6.13 1.14 Key success factors 6.14 1.15 3.15» Mass market pricing» Easy to install plug and play» Simple user interface with remote control on individual room basis» Highest level of data security» Technology/products covered by patents and licenses» Leverage RWE know-how in energy core business Planned next steps/targets» Further build on first mover advantage in terms of customer insight, product development and placement» Establish RWE Smart Home as Data hub for energy related information (smart meter data, etc.)» Further integration of third-party devices/machines» Participation in future market growth with low capital intensity» RWE Group wide marketing in other European countries RWE in district position for further margin growth by cross- und up-selling. 1 Devices = Smart Home Controller and additional devices (e.g. radio controlled switches, thermostats); smoothed curve RWE Deutschland AG May 2015 Page 17

RWE Deutschland Supply Smart markets: We use the potential of energy services with distributed generation CAPEX Energy services [ m] 80 75 80 2014 2015 2016+ Energy services growth in implementation Energy services business with diversified portfolio Local and district heating» Major source of revenue» Classic district as cash cow Contracting solutions (heating, cooling, cogeneration, compressed air)» Strategic growth area» Main part of CAPEX dedicated to contracting solutions Consulting services (energy controlling, thermography)» Strike to initiate asset-based transactions and special products Special Products (Virtual Power Plant etc.)» Importance of innovative products is steadily increasing Energy services: approx. 500 million revenue and 45 million operating result in 2014; expansion investment: 75 million in 2014 to over 80 million in 2015, further growth planned for the next years expected IRR approx. 8% RWE is the largest German energy service provider RWE Deutschland AG May 2015 Page 18

RWE Deutschland Supply New function of RWE Retail Board: Create additional value from RWE s international customer base Structure RWE Retail RWE AG CEO CFO COO CHO > B2C sales > Customer service > Portfolio management Retail Central Eastern & South Eastern Europe (RWE East) Retail Great Britain (RWE npower) RWE Retail Board (functional focus) Retail Netherlands/ Belgium (Essent) > B2B sales > Retail innovation > Lean company Retail Germany (RWE Deutschland) Targets» RWE Retail established to leverage and grow competencies throughout a large customer base of over 23 million private and commercial electricity and gas customers across Europe» RWE Retail responsible for target-setting for the regions and for accelerating know-how exchange and value creation» Cooperation pilots across retail have already paid off, e.g. Retention management End-to-end process design (regional focus) 1 In personal union CEO of RWE Deutschland RWE Deutschland AG May 2015 Page 19

Summary Based on changing energy markets we have three basic strategic pillars Distribute Sell Develop Outperform regulatory targets by optimised investment strategy and highest operating efficiency Maintain position as top performer with high value customer base Develop and success-fully implement new business models for a smart energy world with valueenhancing growth potential RWE Deutschland yields continuously high contribution to RWE Group s value RWE Deutschland AG May 2015 Page 20