Bernhard Günther - CFO Stephan Lowis - VP, IR

Deepa Venkateswaran - Bernstein Ahmed Farman - Jefferies Michel Debs - Citigroup Lueder Schumacher - Societe Generale Peter Crampton - Macquarie Bobby Chada - Morgan Stanley Andreas Thielen - MainFirst Sam Arie - UBS Peter Bisztyga - Bank of America Merrill Lynch

Welcome to the RWE conference call. Bernhard Günther, CFO of RWE AG will inform you about the developments in the first quarter of fiscal 2016. I will now hand over to Stephan Lowis.

Yes, thank you and good morning from my side. I will make it short and crisp. We will present our Q1 numbers 2016 and with this, I would like to hand over to Bernhard. Bernhard Günther: Yes, thank you Stephan and good morning from me as well. You know, from our recent conference calls that we concentrate on the main and most important facts. The further step in this direction is the Q1 interim report which we provided you with this morning. After the change of the German Securities Trading Act at the end of last year, the Frankfurt Stock Exchange amended the reporting requirement for Prime Standard list of stocks. As a result, the quarterly information for the first three and the first nine months of the fiscal year can be reduced significantly. Hence, we have reflected this in our Q1 interim report as you can see in today's publication. Nevertheless, all important information about the operational performance and other important financial information is still included. We believe this is of help for you as well. Against the difficult market environment in which we are acting, the figures for Q1 2016 show a good start into fiscal 2016. EBITDA and operating result are above previous year's figures and adjusted net income is at minus 2% slightly below the level of Q1 2015. I will come to the details of the operational performance, our debt and our cash flow situation and our outlook for fiscal 2016 in a minute. Let me first emphasize that we are well on track with our preparations for the planned IPO of our NewCo. The new company had its operational start on first of April and executive management as well as operational management is in place. Depending on the market conditions we are optimistic to be ready for the IPO at the end of the year. Such a move in less than 12 months after the announcement is a huge challenge and we are proud of what we have achieved by now. One of the reasons for the difficult market environment I mention is the political uncertainty around financing of the nuclear exit. In this respect, the nuclear commission which was instituted by the German government presented its recommendation at the end of April. We believe that the distribution of responsibility between the companies and the state proposed by the commission is logical in principle, and that the concept is heading in the right direction. RWE AG honors the obligation it has to fulfil, in phasing out nuclear energy. We have accrued provisions for this which are very conservative, even when compared at the international level and therefore constitute a strong financial precaution against the risk of cost increases. However, the risk premium proposed by the commission on top of this isn't irresponsible [ph] on new burden on RWE AG. It is unfortunate that the commission has failed to take the company's economic situation into account. What is decisive now is the manner in which the legislator implements the proposals. Now on to the development of the key performance indicators in the first quarter. Let me start on Slide 4 which shows the development of the operating result by division. The earnings increase in the first three months is mainly due to the positive development in energy trading which supported very high profits in the Q1 period. This was partly offset by the negative earnings trend in conventional power generation mainly due to the decline in realized generation margins. Nevertheless earnings contribution of this division is disproportionately high in Q1 2016. Nuclear fuel tax and higher maintenance costs will come in the rest of the year. Furthermore Q1 benefitted from one-off gains from the sale of real estate. Slide 5 shows the earnings development from EBITDA, down to adjusted net income. The major value drivers are mentioned on the slide. Let me explicitly mention two of them. First, the financial results suffered from the loss from the sale of securities while last year we recorded profit from such transactions. Second, the tax rate for reconciling reported and adjusted net income was extraordinarily low in Q1 2016. This is mainly a result of one-off tax benefits in the context of new reorganization of the group. Slide 6 shows the development of our cash flow from operating activities. It comes down by €1.4 billion to minus €2 billion. The strong decline is mainly a result from higher variation margins after the steep decline in commodity prices at the beginning of the year. This is mainly a timing effect as with the realization of the underlying contract, the cash flow situation will revert again. On Slide 7, you see the details of the development of our net debt. It increased by €2.8 billion to €27.9 billion mainly for two reasons. First, the negative cash flow from operating activities. Second, lower interest and discount rate and corresponding higher pension provisions increased net debt by €1.1 billion. Let me conclude my remarks with the outlook for 2016. First, on Slide 8, for the key earning figures of the group. We confirm the earnings guidance we gave in March. The increase we have seen in Q1 2016 for EBITDA and operating result will not sustain for the rest of the year. Positive one-off effects in the second half of last year, SE VSE revaluation and the profit from the sale of a stake in the Galloper project are two reasons. Moreover Q1 2016 had positive one-offs which mainly impact earnings development in this quarter rather than in the full year. This is the sale of real estate in conventional power generation, the sale of grid assets, and the revaluation of our participation in West Energy in the division Grids/Participations/Other. Furthermore the strong earnings improvement in our Trading/Gas Midstream division in Q1 2016 may not be extrapolated for the full year. In addition we expect higher costs, for example, for maintaining our power plants and for maintaining and operating our grid infrastructure which will impact our earnings mainly in the rest of fiscal 2016. The only change to the outlook we gave in March is for our net debt. Our expectation so far was in the order of last year's level, which was €25.1 billion. We typically assume no change in interest and discount rates for our outlook. As I explained for the development of net debt in Q1 2016, interest and discount rates for our pension provisions have come down, hence our pension provisions increased. As a result, we now expect a moderate increase in our net debt for the full year. On Slide 9, you find the divisional outlook. The numbers for 2015 are slightly different to the numbers provided in our annual reports 2015 in March. The deviations are mainly caused by the reallocation of Mátra and Markinch to the convention power generation division. The reallocation has no influence on the guidance we gave in March and which I can confirm. With this, we are now happy to take your questions. Stephan?

Yes, thank you, Bernhard and you all know as there is two-question rule only in the first round, so operator please.

[Operator Instructions] Thank you. The first question comes from Deepa Venkateswaran, Bernstein.

Thank you so much. My first question is about what’s your long term expectation for the tax rate for RWE AG? And secondly, on the nuclear financing solution, so I think in your video you said that you expect a pragmatic and realistic solution. So could you just basically help us understand where do you want to see the premium go to from 35% for it to be acceptable? And maybe just one add-on, can you just clarify what's the total amount of provision plus the premium fee? Bernhard Günther: Yes. Hi Deepa. So our long term expectation for the normal tax rate on RWE AG level would be 20% to 30%. But we all know that in the future years, there may be a significant volatility in that number. Second question, or 2a I might say, nuclear exit. We won't comment on any premium or red lines. We are still in discussions and we are still analyzing the recommendations by the commissions which are by their very nature vague in some aspect and need further detailing and specification. Anyway, and what I said about pragmatic solution is that we are working towards it. So it's still open, how it will all end. The total amount just on a kind of a pro forma illustration is roughly out of the €10 billion, overall nuclear provisions, some €5 billion are affected by the recommendations for externalization directly, this is interim and final storage and if you apply 35% to it, this would be roughly €1.7 billion. So the overall sum would be €6.7 billion but this is just a back of the envelope calculation. No audited numbers.

The next question is from Ahmed Farman, Jefferies.

Hi. Morning everyone. So just one question. If the final nuclear deal requires you to only transfer fund quickly to the current value for liability. How much of NewCo do you think you'll have to divest to maintain a BBB, BBB minus type rating, and to manage the liquidity pressures? Thank you. Bernhard Günther: Yeah. This is speculating about the future with a high number of unknowns contained in it, like power prices, like the overall development of the NewCo IPO. So we don't give any precise guidance in the sense of what if cause and effect logic, what we would do given any number of nuclear fund externalization. Please bear in mind that apart from the group restructuring the NewCo we still kept on our balance sheet in 2015 the proceeds from the sale as well.

The next question is from Michel Debs, Citigroup.

Good morning. I just have one question. You have, I think, used the word unresponsible when speaking about the premium that the KFK commissioner recommend. Does this mean that you are ruling out a possible rights issue that a competitor has ended to, you will not do a rights issue? Is it something we can take away from the call? Bernhard Günther: Hello Michel. Again these what if considerations are pure speculation at this moment in time. Please bear in mind, as I said a) we still have their proceeds in our account and secondly, one of the very reasons why we announced the group restructuring in December last year was to gain additional degrees of freedom to cover liquidity needs of whatever source and origin on RWE AG level.

The next question is from Lueder Schumacher, Societe Generale.

Good morning. Two questions, one is obviously on the nuclear provision debate, understand that you're reluctant to talk about the size of an acceptable premium. But what is it the way forward from here? What is the timeline? I guess the overall idea must be to find an agreement between all parties before the summer recess in July. But are actually talks taking place at the moment, are they scheduled, if you’d just give an idea of the way forward from here? That's the first question. Second question is on the tax again. You gave a rather wide range of 20% to 30%, now after the restructuring of the group, of course there are many one-offs because you can use your tax credits again. But what if a more normalized tax rate for the restructured RWE Group once the one-offs have run out, is it more like 30%? Bernhard Günther: Yeah. Hi Lueder, on the way forward, now on nuclear, again as stated before we are reluctant to give any precise details but we are in close contact with the Berlin administration on various levels. And I think broadly speaking we operate under the same expectations around the timeline, the government aspires to. So it might be that before this summer break we see a further detailing of recommendations from the government. Although we all estimate this to be a quite ambitious timeline. So on the tax rate, the number we gave you was the normalized corridor and as you know current with the group restructuring underway there are more variables in the tax equation for the both entities than they would normally be. And so giving a more precise number would not make any sense. Okay, Lueder or – not okay, I guess. But you will have to live with it. Sorry.

Well, as I didn't really get an answer to that [indiscernible] to further question. On the net debt, you mentioned a moderate increase which you expect now for the full year. Now you also said that your previous guidance or your guidance in general does not include any changes in the discount rates, so can we conclude that the increase in pension provision and mining provisions to €1.2 billion is basically the moderate increase to net debt you expect for the full year? Bernhard Günther: Yes. A short answer but count as a question.

The next question comes from Peter Crampton, Macquarie.

Good afternoon, two questions. Firstly we're having UK capacity payments brought forward by one year. I was wondering what your views on the impact on 2018 from that would be? And the second question relates to the German nuclear tax court case. Any idea on timing? Bernhard Günther: Let's start with the second question. We have no update on the timing on the nuclear court cases. So we would still expect it for 2016 but unfortunately the German constitutional court is not bound to our wishes for the timeline. On the UK capacity, one year earlier auction for us, it’s too early to tell what it will exactly mean.

The next question comes from Bobby Chada, Morgan Stanley.

Hi good morning. Two questions; the first is on the UK retail business. You made some comments about profitability in the first quarter and moving back into the loss in the second quarter. And I also saw some headlines I think from the press conference where customer losses were around 20,000 in the first quarter. Can you give us a bit more detail on how you're going in sort of resetting that business, what progress you're making in terms of getting it to a stable level, because it will be quite an important driver when we get to the NewCo IPO I suspect? And then secondly, in terms of the restructuring and getting us towards the IPO sometime in Q4, can you give a bit of an update on the key hurdles that you've passed internally? I know the business has started operating as an independent unit. But how much of the kind of the major hurdles do you think you've passed and what are the next few that are -- that will determine whether it can really get done in Q4? Bernhard Günther: Yes. Hi Bobby. Maybe starting on UK retail, yes we confirmed also in the press conference that the Q1 numbers for our UK retail business are positive and the rough number is around 100 million British pounds. Operating results which I think will also be published by Npower in an hour's time. So this is broadly in line with what we see last year. We all know and, certainly you know as well that the UK retail business has a very accentuated seasonal profile in its earnings and therefore the first quarter traditionally always has been by far the most profitable one. And these numbers should by no means be extrapolated to the full year. We have our recovery plan underway since the beginning of the year. Therefore it’s still early stages but as far as we can tell we are making good progress there and moving towards our goal of being back to normal profits in 2018. But you also know that our guidance for ’16 was that we would still expect overall for the full year losses in that segment. On customer accounts, yes, we managed to somehow stopped the outflow of customers we’ve experienced throughout 2015. In the first quarter of ’16 there was just a loss of 20,000 customers roughly which is certainly positive. Although for some of those customers to retain them we had to migrate them on to a contract with lower margins. On the group restructuring, that's your second question, we can broadly say that all the internal preparations for the IPO in Q4 are on time and on budget which I think is a huge success and this is something where you will now experience something rather rare for me. It's a big thank you online to our team who made this happen. If I think back to December last year when we announced it and we announced a timeline which gives us. 10 months to get the IPO done compared to most other recent German carve-outs and IPOs which took fifteen to eighteen months. I thought being still fully on track with our internal preparations by the middle of May 2016 was the best case scenario. We are delivering on this best case scenario. So I think this is a big thumbs up on that one. So yes, the new company has started first of April without any delays and without any operational hiccup. And for example, another important milestone, the agreement with the unions has been sealed yesterday which is very important for the employee transfers in our German operations. So this was one of the big remaining outstanding issues to be resolved. All in all, the traffic lights are very bright and green there.

The next question is from [Philip Bonhoeffer, Netzehe]

Yes, good afternoon. Just one question. You know, lots of detail about your recons [ph], one, you mentioned in the press release that you have revaluated the stakes in West Energy. Could we have this amount you included in your EBITDA? The second one, detail is concerning the energy derivatives. You mentioned that there was a sharp increase. Could just we have the amount for Q1 ’16 versus Q1 ’15? Also concerning the amount of the capitalization of deferred tax assets, you mentioned that they were substantial, just provide the amount. And you mentioned on the page 4 of your presentations some real estate capital gain. Could we have also the amount? Many thanks. Bernhard Günther: Yeah, so I start with the revaluation of West Energy. This is a small double digit million euro amount. On the energy derivative and the other aspect, we don't give further detail on the exact numbers. Sorry. I think there was one question still outstanding. Can you repeat -- something around deferred taxes?

Yeah. You mentioned in your press release that there is a substantial capitalization of deferred tax assets. Could we just have – in order to reach a 14% tax rate, just to have an idea about the amount you capitalized this quarter versus first quarter ’15? Bernhard Günther: No, we don't provide this information here. It's correct that there is a big difference and this is due to the restructuring which open to opportunities you would otherwise not have had. Sorry that’s it.

Just one clarification. When you mentioned your net profit, adjusted one, this figure is including all the items I mentioned? Bernhard Günther: The adjusted net income is basically the net income which is corrected for the non-operating without including a theoretical tax rate on the non-operating result. That’s all the adjustments that have been made. So everything else is in.

The next question is from the Deepa Venkateswaran, Bernstein.

Thank you. So I'm going to come back to my favorite topic on the nuclear provisions. So my understanding is that the 5 billion, you would need to anyway hand over to the new nuclear fund at some point as per commission report immediately. So is the scope of this timing also something that you would be discussing? Secondly, if you assume that you do pay this 5 billion but then do not pay the risk premium, doesn't that expose you to quite an asymmetric risk, i.e. you’ve lost all the cash and receivables of 5 billion, you don't get any income from that. At the same time you're then perpetually liable for an uncapped liability if you didn't pay that extra 1.7 billion. So just wanted to understand your thoughts on this. Thank you. Bernhard Günther: I think broadly you are correct. Both your assumptions on the timing of how fast we would have to fund the 5 billion. This is our expectation that this will be part of the discussions we will be having with the administration over the next couple of weeks. And we are quite positive there that there might be some flexibility in the timing more than you might assume from reading the commission's report. On the theoretical question what would be the case if we just pay the 5 billion excluding the premium and not getting rid of the liability. So far from the latest version of the report -- or the final version of the report we see, it’s not clear to us if this is an option at all and therefore we would not speculate but rather these are both issues as I said that will be subject to the discussions we have with government in the next week.

So just a follow up, so are you saying that it’s not an option to basically not fund the full amount plus premium. So can it be binary i.e. that you don't fund anything, you don't give the government anything. Or you then give everything plus the premium, it’s either of these or -- you have to anyway give the 5 billion no matter what? Bernhard Günther: It’s still open because I mean this is a recommendation by a commission and the government will now take this and probably try to cast this into law and it remains to be seen. I would love to be more precise but at this point in time. It's an open ended story.

The next question comes from Andreas Thielen, MainFirst.

Yes good afternoon. For change something on the operational side. You gave the indication that in the supply business, it was above average in Q1. Is there any reason to believe that it would be lower -- I know it's highly volatile and so there is not really a normal quarter but is there any reason to believe that it will be below what would be an average in the next three quarters? And secondly again on the tax side, I mean with the reorganization you obviously have been able to get some improvements for 2016, it's probably too early to talk about the next year, you pointed to volatility in the tax results. Planning is difficult but taking all this, last year you told us that we should expect something more around 40% for the next year. So has anything changed in your thinking then on that side? And on the non-operational side in terms of questions, can you give any update on your situation in the nuclear moratorium claim? Bernhard Günther: Yeah. Hello. So the above average first quarter is something which did not need us to modify our full year guidance as you have seen on the last slide of our presentation. The only thing I can say in addition to that is if you look at the quarterly profile of earnings in our supply and trading division. You will always see also in previous years that it was that -- there were quarters where there was not much happening at all and then there was quarters where almost a full year profit was made. This is no law of nature but normally on traders gain on high volatility in the market and if the markets are calm and quiet, it’s less. So we don't know how the markets are going to be in the rest of the year that, and that’s why we don’t adjust our guidance in anyway. With the tax rate you mentioned to 40% that we had mentioned in the middle of last year which of course -- the numbers you're hearing now. I think we are in a new game now with the restructuring of the group. The German tax unit is being also reorganized and this in conjunction with the revaluation options we have with the group restructuring gives us various options for tax optimization. And your question on the nuclear moratorium there's no news on that. We said before that there's also no read across from what was mentioned or what was judged on NBW’s claim in that that matter – on our claim. Because this was a different way they approach the whole matter.

The next question comes from Sam Arie, UBS.

I have two questions and the first is just a clarification on the hedging. And I think I see in the slides today that your 2018 hedging is now up to 70%. And if I'm right, that was at a value under €30, but if you could just help us understand, under €30 is, I think previous years close to €30. So just trying to see where that 2018 hedging is coming out? And then the second one maybe an accounting question but will give us – help us understand sort of how you'll see in this 1.7 billion potential surcharge. Is that something we're likely to see a big provision for in Q2 heading into the economic net debt, or will you hold off that for the time being, do you consider it still not certain enough to provide against? Bernhard Günther: Yeah, so starting with your first question. I understand that you would like to have more precision on the below 30. What that means -- I mean of course it's not that we don't mean zero, yeah. It’s very clear also technically €30. And you know that normally in these – we’re operating in €5 bracket in this indication. But we won’t be more precise than that. On the €1.7 billion in order to recognize this accounting wise w need a law for us and until then I would not expect anything being reflected in our accounted numbers.

The next question is from Bobby Chada, Morgan Stanley.

Hi thanks. Could I come back to the restructuring and set up of NewCo? Can you say if you're any further on in your thoughts or discussions as to how the debt structure at NewCo will be set up? I think at the time of the -- when you announced the restructuring you talked about 3 to 3.5 times leverage for NewCo most likely with an intercompany loan between AG and NewCo. But there was some discussion about whether the bonds – AG bonds could possibly be moved across NewCo. Can you give us any help? I suppose you should call energy now but can you give us any help with, how would that get structured at energy might work. Bernhard Günther: That’s a nice try to get something out of us. I haven't understood this, but I think we’ve referred to NewCo. On the leverage factor that no news and we remain tight lipped on that one. But on the overall plans with the senior bonds that we have, we can say that as you said we announced already that we want to push it down economically into NewCo already with the IPO and after the IPO we are analyzing options towards – to do this legally so that they will be fully owned by NewCo not just economically. That’s at least our plans and the hybrid for reasons of their treatment, also by rating agencies what are likely to stay with RWE AG. That’s the news we have there.

And just a follow up on that, is just economically pre-IPO and then try and sort of physically move the debt post IPO, is the IPO hard line on that so you can't do it before. You can only do it afterwards. Bernhard Günther: No, I think this is rather owed to the overall tight timeline that we have.

The next question is from Peter Bisztyga, Bank of America Merrill Lynch.

Yeah, good morning. Couple of questions, first one, just on power prices, I should just be interested to know whether your traders think the sort of recent recovery to kind of €24, €25 on German powers sustainable. And indeed whether that sort of brings your lignite business back in sort of cash positive territory? And then the other one was just S&P think of you on potential for a two notch downgrade to sort of sub-investment grade. Can you just remind us your sort of contingency planning for this, particularly for your trading activities? Bernhard Günther: Yeah. Hi Peter. So on power prices of course our traders have a view. But I'm sure you fully understand why I won’t share it with you, because they're trading on that. On the risk of a two notch downgrade by Standard & Poor’s this is something of course where we are doing our homework to be prepared for it but that's all I can say. That is not to say that we are expecting it but we are prepared.

The next question is from Ahmed Farman, Jefferies.

Hi. Sorry for coming back to the nuclear issue again. And I think, Bernhard, you said this morning that if you had the proposal as it, it will create excessive burden for the ratings. Perhaps could you perhaps elaborate a bit on that point and sort of help me understand how audibly you see the implication of the proposal? And secondly, other than the premium itself, are there any other parts of proposal that you also seek to negotiate with the government and you currently see as problematic? Thank you. Bernhard Günther: Yeah. Maybe I start with the second part of your question. First, on other parts I mean there are various parts in the final report by the commission which are still very vague as I said. So they are nowhere near to what it would take to have a fully reliable legal basis for a new set up. And this is not only just the premium but also many other aspects which are now -- will be worked out most likely over the next weeks and even months. Yeah. One of them I already mentioned, for example, is the timeline for the funding. And so just to give you one example. On the rating, but just to illustrate what it means. I mean we always said that rating wise the impact is far more critical than on the equity side, because rating wise there’s only downside even if we externalize only the existing provisions at face value as they are in the balance sheet. We would transform non-financial debt into financial debt, which is from a rating perspective always negative – a negative change especially given that the non-financial debt had a duration which was so long that we had an equity credit of 30% on the rating treatment of that debt which would most likely fall away naturally if we externalize it with cash over the next couple of years. So this is one effect. The second effect of course is the premium itself, which is even an increase. Yet to say adding insult to injury in a way that we -- on this 5 billion we currently have roughly an equity credit of 30% which means that rating wise this €5 billion count as €3.5 billion of debt if we externalize them including a risk premium of 35%, it would be the back of the envelope number, 6.7 billion. So it would be more than 3 billion more. What I would call rating debt peer compared to where we are now. I mean this is currently not something which grants you a better rating treatment. Therefore we are not amused about these proposals. End of Q&A

At the moment there are no questions.

Okay. Then we had also a second round. Thanks for dialing in. And hope to see you soon in London or whilst we are doing road shows and take care. Bye bye. Bernhard Günther: Bye bye.

Ladies and gentlemen thank you for your attendance. This call has been concluded.