Energy Trading Jonas Abrahamsson Senior Vice President Trading E.ON Capital Market Day Nordic Stockholm, July 3, 2006
Agenda The Nordic Power Market The Role of Energy Trading within E.ON Nordic Page 2
General overview Nordic market power & gas Power market fully deregulated since January 1, 1996. Wholesale power prices set on Nord Pool. Retail power prices are based on Nord Pool prices. Third Party Access plus open transparent grid prices ensure a well functioning deregulated market. Gas market in Sweden was opened up on July 1, 2005 for all industrial customers. Gas market in Sweden will be opened up on July 1, 2007 for households. Page 3
Today, liquidity in power and interconnectivity among Nordic countries is already high Nord Pool history and facts The marketplace opened internationally in 1996. > 300 players, from 14 countries, fully transparent and liquid market. Financial forward market trades at 5-8 times the physical market. Central market model seen as role model within EU. Key issues Interconnections within Nordic treated by implicit auctioning through Nord Pool. Internal price area differences due to existing bottlenecks expected to decrease. Not fully harmonized market rules and Transmission System Operators. 450 400 350 300 250 200 150 100 50 0 Elspot traded volumes vs total demand Planned investment projects in Nordic area Grid Project Bottleneck 500 MW by 2010 800 MW by 2010 600 MW by 2010 800 MW by 2012 1996 1998 2000 2002 2004 2006 500 MW by 2010 Traded volume via Nordpool Total Demand Page 4
Market places in the Nordic market STATNETT 50% SVENSKA KRAFTNÄT 50% FINGRID 20% 20% 20% ELTRA 10% ELSAM 10% Physical NORD POOL 20% NORD POOL SPOT NORD POOL CLEARING Elbas Physical Elspot Financial Eltermin INTRA-DAY EXCHANGE DAY-AHEAD EXCHANGE FUTURES-EXCHANGE Financial OTC Hourly High turnover Electronic trade Product structure Larger part of total liquidity Telephone Product structure Bottlenecks Separate priceareas Price-cross model Trade once a day Day Week Month Quarter Page 5
Hydrology & System price Nord Pool 2002-2006 120 110 100 90 80 70 60 20 Page 6 50 10 0-10 -20-30 -40 40 30 20 10 0 24 20 16 12 8 4 2006-01 48 44 40 36 32 28 24 20 16 12 8 4 2005-01 49 45 41 37 33 29 25 21 17 13 9 5 2004-01 49 45 41 37 33 29 25 21 17 13 9 5 2003-01 49 45 41 37 33 29 25 21 17 13 9 5 2002-01 Average price EUR/week Deviation from normal in TWh System Price Hydrology
The CO 2 market increases marginal cost for fossil generation 100 Power Supply in the Nordic Market without and with ETS, 20 /ton (normal year) 90 Wind Power Hydropower 80 Nuclear power CHP, ren Operating Cost Eur/MWh 70 60 50 40 30 Import Condensing power, coal Condensing power, oil Incl ETS CHP, fossil Import Gas turbines Demand 2005 20 10 0 0 100 200 300 400 Available Annual Energy TWh/year Page 7
Power prices are influenced by CO 2 market 33 28 23 18 13 8 Page 8 2006-06-14 CO 2 /ton 52 50 48 46 44 42 40 38 36 34 Power /MWh 2005-11-30 2005-12-15 2006-01-02 2006-01-17 2006-02-01 2006-02-16 2006-03-03 2006-03-20 2006-04-04 2006-04-24 2006-05-10 2006-05-29 CO 2 Power 07
Price drivers in the Nordic power market CO 2 trading is driving internationalization of the Nordic power market. Hydrologic situation is still very important, but Price on emission allowances and the worlds fuel markets has a major impact, which makes the Nordic power price depending on - Weather in Europe - Price relations between coal and gas - Development in Asia driving the fuel markets The Nordic power market is strongly correlated with international energy markets Page 9
Our view on long-term developments in the Nordic market Supply demand balance: Power demand will increase slowly due to energy efficiency measures. Supply will increase but depends on investment climate. Stabile conditions are important. The Nordic market will be even more integrated with continental Europe in the future due to: Stronger cross-border connections. Similar long-term marginal costs if new nuclear and hydro power can not be built. Hydrologic situation will still have an influence in the future. Page 10
Important (intermediate-) step is the further development of integrated regional markets Regional market approach with regional segmentation by DG TREN 1 One common European energy market will be reached by a stepwise approach Nordic Segmentation is not fix as regions will develop following fundamental factors UK Western Europe Eastern Europe Baltic Iberian 1 EU-Commission: Directorate-General for Energy and Transport Page 11
Agenda The Nordic power market The Role of Energy Trading within E.ON Nordic Page 12
Value Chain Before deregulation: Generation Transmission Distribution Sales Customers Producers market Page 13
Value Chain In a liquid & transparent commodity market: Transmission Distribution Cost efficiency Availability Group portfolio optimizer Risk/Return decisions Flexible position taking Value creation Customer focus Margin thinking Market segmentation Generation Trading/ Optimization Sales Customers Nord Pool Page 14
Separate portfolios for generation and end customer sales are required As the market evolves, transparency and clarity in optimization decisions throughout the value chain are necessary. Even in an integrated utility you are long with your total generation capacity as the end-customer market evolves towards transparency. Separating the portfolios is necessary and provides: - Improved visibility / understanding / communication of core risks - Reinforcement of core business responsibilities. e.g. End customer pricing in sales Commodity price risk management in trading - Design of strategies to capture value of opportunities whilst managing risks. Page 15
Positions in generation and sales Generation fundamentally long MW Sales short positions MW Time Time Return on invested capital Managing price risk = open position, exposure = hedges Hedging back-to-back Margin thinking = generation, sales contracts Page 16
Risk management to maximize long term shareholder value Purpose of risk management is to maximize shareholder value. Important to find the optimal balance in creating shareholder value. Shareholder value Return? Risk Value Protection Value Creation Value protection Value creation Hedging strategy revised giving more room to use opportunity to optimize long term value creation. Page 17
Financial risk management: An important issue for E.ON Sverige Nordic power market is a volatile commodity market In comparison to other Energy markets Liquidity high gives us flexibility Risk management policy affects cash flow and result Impact on cost of financing Impact on strategic options available Impact on E.ON Sverige profit fluctuations Cumulative Probability (%) 100 80 60 40 Risk management is closely linked to corporate strategy Risk appetite and ambitions on value creation Is a tool to maximize shareholder value 20 0 0 100 200 300 400 500 600 700 800 Spot price (SEK / MWh) Page 18
The role of trading and key success factors are very different in a liquid and transparent commodity market The role of trading changes from a dispatcher to an optimizer performing integrated physical and financial strategies cross commodity from spot and all along the forward curve to leverage portfolio value. Information disclosure rules implies no information advantage must be compensated with competence advantage! The importance of having the best view of the market increases the capabilities to systematically outperform the market with fundamental forecasting become crucial. Financial engineering capabilities necessary to leverage asset optimization, enhance risk management and capitalize on flexibility. Competence development by cross fertilizing traditional fundamentally oriented traders with financial experience within clear objectives and clear mandates. The need for faster decision making requires very clear mandates and an extensive risk control. Clear key performance indicators must be in place to trigger value added activities. Page 19
Some critical success factors for optimization and value creation Quality and stability in back-office Extensive risk control clear mandates and limits governance Common and clear values ethics and moral Decentralized and rapid decision making Business creativity and development Top-of-the-line price forecasting High skills in organization energy trading (fundamentals & financial) On going and active support of individual competence development Get the right people on board drive and courage Page 20
Conclusions Nord Pool is a well functioning, transparent, and liquid wholesale market. The Nordic power market is the role model for European development. The commodity business model of E.ON Nordic has proven to be successful. Active risk management and optimization important to protect and create long term value in this market environment. Energy Trading has developed into a core part of the business of E.ON Nordic during 10 years in a liquid and transparent commodity market. Page 21
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 (www.cnmv.es) and E.ON (www.eon.com). 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 www.sec.gov. 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 +49-211-4579-453. 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 www.eon.com. 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