Gunhild Grieve - Investor Relations Markus Krebber - Chief Financial Officer and Member of the Executive Board

-: John Musk - RBC Lueder Schumacher - SocGen Alberto Gandolfi - Goldman Sachs Michel Debs - Citigroup Deepa Venkateswaran - Bernstein Nick Ashworth - Morgan Stanley

Welcome to the RWE Conference Call. Markus Krebber, CFO of RWE AG will inform you about the developments in the first three quarters of fiscal 2017. I will now turn over to Gunhild Grieve.

Thank you, very much and good morning, to everyone on the phone and to those of you who joined us via the webcast. I'm joined here by Markus Krebber for the presentation on the first nine months of fiscal year 2017. We know that your focus is probably not so much on our numbers but rather the correlation talks in Berlin. However, I hope you do understand that we cannot comment on the current discussions as we are not ourselves part in those. As with our previous presentations, we will concentrate on RWE standalone where appropriate, we show the relevant Group figures which you can also find in the interim statement. In order to focus on your questions, we have kept it short. So, let me hand it over to Markus.

Thank you, Gunhild, and good morning, ladies and gentlemen. Our Q3 results show that we are making good progress on our short-term deliverables which we discussed on our Capital Market Day. Let's turn to the review of the main messages for the first three quarters on Slide 3. The performance of RWE Group continued its positive trend, EBITDA improved by approximately €350 million and adjusted net income was up by approximately €650 million. The latter was supported by a strong improvement of the financial result. This development is in line with our expectations, and hence, we confirm the outlook we have given for 2017. We are now even more confident of achieving the upper end of our guidance. For RWE standalone, normalization of the earnings in our trading business was the main driver for the positive development. European Power also performed well due to higher contribution from our commercial asset optimization. Therefore, I can also confirm our expectation for RWE standalone to reach the upper end of our guidance. Although we have not yet concluded the first fiscal year of the new RWE, let's have a look at our short-term achievements as set out at our Capital Market Day. We are well on track regarding the further optimization of our operations. We have a target to improve our operational cost base by €300 million by 2019 compared to 2016. For fiscal year 2017, we now expect to realize more than one third of this in our earnings. Another important goal was to bring our trading activities back to a normalized earnings level after the losses they've experienced in 2016. Our figures for the first nine months show that we are well on our way. The strong earnings contribution from commercial asset optimization, our European Power division is evidence of the excellent cooperation between our technical and commercial asset management which we see as a real competitive advantage In addition, we announced our Capital Market Day steps to optimize our capital structure and our financing activities. We have called and not refinanced all 2017 hybrids, the last one of these funds $1 billion was paid on October 12. With the reimbursement of the nuclear fuel tax, we gain additional financial flexibility and we decided to use approximately one third of the funds to buyback outstanding hybrid bonds to bring us towards our targeted range of hybrid capital and strengthen our future earnings and cash flows. The nominal value of the hybrids we bought back in Q4 amounted to €585 million. We paid a premium of approximately €33 million which we will book in our financial results but which we adjust our reconsideration of adjusted net income and the distributable cash flow. As a result of the, buyback we expect a positive impact on our financial results and distributed cash flow for the residual years of bonds of approximately €20 million on them on average. As you know, we will use €650 million of the nuclear fuel tax refund to pay a special dividend in May next year. This leaves roughly another €500 million of the proceeds. We are currently working on further measures to use these proceeds which will strengthen our cash flow profile further. We expect to announce more in due course. We also finalized the financial separation with innogy by setting up two independent credit facilities. RWE's emended €3billion facility dated 2021 is the main pillar to cover RWE's liquidity buffer requirement and is provided by more than 30 core banks. Let's now move on to the details of operational performance in the first three quarters of the year. Slide 4, shows the development of our adjusted EBITDA. For RWE standalone, it amounted to €1.7 billion. So dominant driver in the first nine months of 2017 was a recovery of our trading activities to a normalized level. The adjusted EBITDA also includes an innogy dividend of €683 million for fiscal year 2016 that we received in April. In the previous year, we had a comparable figure of €730 million which represents a pro forma appropriation of profits of innogy subsidiaries before the IPO. And this figure was higher as it did not include any minorities from the listing of innogy. Slide 5, provides the details of the performance of the Lignite & Nuclear division in Q1 to Q3 and the outlook for this division for the full year. Adjusted EBITDA has come down mainly due to the declining realized generation margin. This was partly offset by the phaseout of the nuclear fuel tax in 2016, as well as our operating cost improvements. Last year, we had a burden of approximately €150 million from the nuclear fuel tax in the first nine months. The declining generation margins are also the main reason for the outlook for the full year of significantly below previous year. The European Power division showed an earnings decline as we had significant higher positive one-offs in 2016. Among others from the settlement of damages of our Ham Unit D power plant. Excluding non-recurring items, EBITDA was up year-on-year. This is mainly due to a strong earnings contribution from our commercial asset optimization and generation margins. This brings me to our current hedge position on Slide 7. The strong improvement in commodity prices and spread is reflected in our hedging. The hedge price for 2020 has improved by approximately €2 compared to our last update as of June 2017. Still most of the hedging in this year is via our implicit fuel hedge and therefore still open to further changes in the spreads. Average hedge prices for 2018 and 2019 have moderately improved as well but not enough to move the rounded prices. Compared to our situation at the end of June, we now closed the implicit fuel hedge for 2018 and reduced it for 2019. On Page 8, you can see the recent development of huge spread, they have strongly improved over recent months. Now on to the performance of Supply & Trading Ranjith division on Slide 9. I had the biggest lever, so we turn to normalized earnings in our trading business after the losses we incurred last year. As we have already achieved the average normalized EBITDA which we expect for this business, you will probably ask what we expect for the full year. Of course, we could end the year slightly above the Q1 to Q3 result however as you know this is a volatile business. Slide 10 provide the earnings drivers down to adjusted net income. Our adjusted net income number reached €930 million in the first nine months of 2017. With this, we have already reached our full year guidance. Please bear in mind that the nine months figures already include the full innogy dividend, but of course it makes us very confident that we will finish the at the upper end of our guidance. Besides the typical adjustment of non-operating result, we have adjustment in the financial result and minorities in tax position all effects relate to the reimbursement of the nuclear fuel tax of target. In the financial results we have also adjusted for the effects from the changes in discount rates for nuclear and other long-term provisions as well as interest resulting from tax audits pro forma of fiscal years. In the minority's position, we adjusted for the effect of the reclassification and white arm [indiscernible] participation, Texas were adjusted according. Now on to distributed cash flow on Slide 11. In the first nine months of the year, distributed cash flow reached €493 million. Compared to H1, it came down by approximately €140 million. This is mainly a result of the development in our working capital. It showed a swing of approximately €390 million in the third quarter which is mainly down to the seasonality of working capital. In addition, as I mentioned in my H1 presentation, we faced out some working capital optimization measures due to our increased financial flexibility. For the year as a whole, we confirm our expectation for the change in provisions in the order of €650 million as we have guided previously. The details of net debt are shown on Slide 12. At the end of September, it stood at €3.4 billion for RWE standalone, approximately €3.5 billion below the end of fiscal year 2016. There are three main drivers. First, positive distribute cash flow. Second, the refund of the nuclear fuel tax of €1.7 billion. And thirdly, a positive effect from a reduction in provisions mainly pension provision which accounted for an improvement of €500 million. One reason is that the discount rate for our German pension provisions increased from 1.7% to 1.9%. Furthermore, pension assets performed well and does contributed to a decline in pension provisions. For the year as a whole, we expect the net debt figure clearly below the previous year's figure but above the last level as of September 2017. The main reason is a lot of equity credit for the U.S. dollar hybrid and the buyback of hybrid bonds both in October. This will increase our net debt by approximately €700 million. On Slide 13, you can see the details of our outlook for RWE standalone for 2017. I have already said that we can confirm the outlook and that we are quite confident to end the year at the upper end of the guidance. The same applies for the outlook for the consolidated group KPIs which you can find in the appendix on Slide 16. This concludes my remarks and we are now happy to take your questions. Gunhild, please.

Thank you, Markus. Although everybody knows it quite well, let me just repeat our two-question rules. Operator, could you please ask the first question?

[Operator Instructions] So the first question is from Vincent Gilles of Credit Suisse. Please go ahead.

Morning, everyone. Two very simple questions. The first one is on Slide 15, the current adjustments inevitable question, if you can help us see through the adjustment, I guess it's nuclear fuel tax related maybe there are other elements we need to be aware of? And the second question is Supply & Trading, good news, it's getting better. Can you help us get a feeling for what a sustainable level of profitability would be across a normal year whatever normal means?

Yeah. Thank you for the questions. Let me start with the last one. A normalized level for full year is around € 200 million EBITDA, so that is where we are already at the end of September and…

So still the same number as the one you gave in the past you don't know…

Yeah, yeah, exactly I mean is that it's a volatile business but on average we expect the business to make around €200 million. Of course, I may clear my remarks that we could end this year slightly higher than the €200 million given that we already had €200 million at the end of September but that's still I mean a volatile business, so let's see where we are at year-end. Then on Page 15, the adjustment, I mean we adjust for the non-operating result and all related tax and minority effects. So, these are the nuclear fuel tax, other non-operating effect and also Mátra which is now in the non-operating results reflected. And then on top, we adjust the financial results for changes in discount rates, because this is typically shown one off effects in the financial result and would distort our financial results significantly because it is quite low in absolute terms. These are the major adjustments.

Thank you. Our next question, please.

The next question is from John Musk of RBC. Please go ahead.

Yeah. Morning, everyone. Two numbers questions really for me. Firstly, you sort of hinted at it but the - you've obviously achieved the vast majority of your net income guidance already, just wondering why you aren't able to potentially increase the guidance given the seasonality in Q4 as usually a quite high although 2018 Q4 is quite high? And then secondly, on the net debt figure, can you just outline the €600 million variation margin, I've seen that's just related to the to the higher commodity prices and then if we're thinking about year-end net debt, are there any other movements to think about other than really just adding on the €0.7 billion related to the hybrids?

John, I mean yes, we make clear we are more optimistic about reaching the upper end of the guidance than we have been three months ago whether will end the year even about the guidance that's too early to speculate. I mean let's see where we are at year-end, but I think we are hinting in that direction that we are even more confident than we have been and in H1. On net debt, yes, the improvement the €600 million variation margin is higher commodity prices especially I mean actually across all commodities especially carbon which was higher in Q3. When it comes to net debt at year-end, we have three relevant figures. The first one is the distributed cash flow we achieve in Q4. The second one is we already mentioned €700 million we loss in equity credit on the hybrid buybacks. And then also the other effects like whether we spend another €500 million from the nuclear fuel tax reimbursement on investment which would strengthen cash flow in the following years whether that is net debt relevant is investment or not, it remains to be seen. And then the last thing is also variation margins again which could also move net debt. So, our expectation, we will clearly end the year below last year's figures but above Q3.

Is that okay, John?

Yes, that's fine, thank you.

Thank you. Next question, please.

The next question is from Lueder Schumacher of SocGen.

Yes. Good morning or good afternoon. Two questions for me. The first one is on the outlook for spreads and carbon market reform, I mean you said you close your position on 2018, do you see the spreads as fairly valued now or I mean I would have thought given that you recently two more gas fired plants that market is getting rather tight over the winter, so the outlook on spreads and then also carbon markets reform that would be interesting? And the second one is on the various discussions on German coal exit, I know it's probably early days but there appears to be two rather distinctly different models being discussed. The first one is just straight closures and the second one is a bit more complicated one where emissions could be allocated, remaining emissions could be allocated to coal plants similar to electricity production volumes during the nuclear phase out. Do you have any idea in which direction these discussions are going or the just too early to tell?

There are even more concept discussed but as Gunhild said, I will not start speculating or what I think the outcome might be and also not speculating about the impact on RWE. We are not obviously not part of the negotiation so we're going to sit and wait and when we have the final result, if there is any then we are going to analyze and then we going to tell you what the impact is and what we think about it, but it's not speculate during the ongoing coalition talks. On your other questions, spread levels and European carbon scheme, I mean you observe as we do with the carbon price, we think by the measures taken EUETS has been strengthened significantly of course market stability results for the elimination of certificates will happen in the 2020's so maybe it's too early to move prices, but I mean it's a clear strong signal to strengthen it which we really appreciate because the European ETS is the only efficient and relevant tool to steer European carbon emissions while other measures are not helpful. So, we've pleased but what is really will do to carbon prices too early, I mean let the market will work it out and then we're going to see where prices go. On spreads, I mean your implicit conclusion that what we think about spreads levels in 2018 is definitely not grown because otherwise we would have that position open. But it's not at a pure trading position, it's also kind of risk managing already the next year's over that we can get clear our guidance is so the tendency to closer position as we go into the year because we don't expect much movement. If for whatever reason spreads are even higher, more capacity would move into the money, so on the spec position, which you can see on Slide 7, the 50 terawatt to 70 terawatt hours will go up if spreads even go further and that could bring additional money. The two additional gas turbines we have the most poll in which are now up and running and up and available. They are we don't expect very significant terawatt hour number but of course it shows you what we think where the market goes in that we have much tighter markets in. Wintertime actually these two turbines already run last week when we see kind of a mini in Germany.

Very good. Thank you.

Thank you, Lueder. Next question, please.

The next question is from Alberto Gandolfi of Goldman Sachs. Please go ahead.

Yes. Thank you and good morning. I also have two on my side. The first one is I am about not talking about coal phaseout and the discussion of the government, but my idea would be, I think at the moment there's quite a lot of focus on what you could lose in terms of revenues from any coal and lignite phaseout. The proposal seems to be a like 3, 5 gigawatts on the CDU-FDP side and 10 gigs on the green side. Can I ask you, you must have run some simulation analysis on what would this do you think to the German forward curves, so what would happen to the power price and what would happen to the spark spread and is that a scenario and just trying to see if there's any offset for you? Second question is bigger picture. Should I take your comments above €500 million as the absolute maximum leveraging potential you have at this stage and would you be willing to use that to acquire some assets, we have seen a lot of acquisitions for instance on CCGT is being very cheap actually at the moment. So, should we think about that for acquisition and if so maybe could you confirm that gas and potentially some renewables would be your structural areas of interest for investment? Thank you.

First, I'm glad that you are in the call Alberto, I'm really sorry about yesterday evening. I'm serious.

More of the tennis fan as of last night. Thank you.

Okay. I mean nice try, of course you can be a sure that we run our models and with that we know exactly how car market prices what they assume in terms of closer than what needs to happen to justify car market prices whether we think it's very important for our those on trading on hedging, but I can also tell you - I will not tell you the results. So that is a company's secrets which we also use to make some money here and there what our models actually show, so you should run your own models and I'm pretty sure you have already done that. And on the potential investment the $500 million I think that's it's also speculation, it's been always depend on how we invest the money, how that is perceived by rating agencies, what that adds to the risk profile and so on. I think there is some more additional head room, but it really depends on how we invest. Coming to your proposal I think that was definitely a good proposal, and then you would keep please keep in mind that we have our agreement and principle with energy and with 77% of it doesn't make sense to start competing with them for renewable business is with energy.

It is fine Alberto, thank you. Next question please.

Next question is from Michel Debs, Citigroup. Please go ahead.

Good morning ladies and gentlemen, two questions please. Number one on the energy you have said that it's a financial investment and down the line she would like to diversify. Do you have a preference between diversifying for our rotation of the energy i.e. sending stake and energy to buy something else or would you rather diversify energy itself making it a broader portfolio? My second question has to do with Netherland, where new government in drafting energy policy and from what I can understand you exposed Netherland to government who wants to tax you to prices and apparently possibly face some cause. Could you tell us little more about what they are actually planning to do and how you think this would impact your business. Thank you very.

Hi, Michel on energy I think there is nothing new I can just repeat what we said before, yes, it is a financial investment. So, the management approach is value maximization, it will always depend on the alternative investment opportunities. They definitely need to meet the kind of energy yield as a hurdle rate which is 4% and 4.5% dividend yield finally. But I will not point in any direction what our thinking is so, whenever we, the county there is no need to do anything because I mean financially we have lots of head room liquidity situation is very healthy. So, there is no need to do anything, if we decided to do anything we will tell you and also why we think that is alright thing to do but we will not pre-announce anything which is not get clear. On the Netherland, I mean the agreement the collision agreement is clear that is published everywhere what they tend to do, I mean as usual the Netherland now what they said up is a very broad dialogue to work out the details of the specific measures and the industries also invited to that, so it's much too early to tell you what that really will do to our business because it will depend on how is that and what kind of measure they take also the question on how they probably compensate that was always on the table and the Netherland get their compensation and for us I mean our portfolio that is quite balance, we have two gigawatts of coal but also two gigawatts of gas current partly most of all which could potentially come back. On the subsidy, on biomass, we expect that all our existing conflicts will stay in place.

Thank you, Michel. Next question please.

The next question is from Deepa Venkateswaran of Bernstein. Please go ahead.

Thank you. My two questions, the first one is if you could I mean you shown on Page 8 that you have seen the spreads improve especially out of 2020. Could you just help us understand how this change the picture, what this changed picture means for your dividend policy, because it was if I'm not mistaken also partially linked to you being able to see improvement in spread? And my second question is on the carbon reforms, you mentioned that it might depend that are some external forecast of carbon price as high as in the 30s. So, in the year say 2021, assuming no big change to your lignite fleet. What would be the impact of a carbon price if it went to around €30 per ton? Thank you.

Yeah, Deepa on Page 8, I mean I would not link that to dividend policy that I mean Page 8, more shows was our earnings potentially in future years quite simple in 2019 and 2020 years. And our dividend policy will stay in place, so we will pay out our distributable cash flow to 100% as we said on the year basis but on average. So, but especially for 20 I mean first have significantly more improve in October already but some market speculation expectation that something will happen on potential closures in Germany. So, it's too early to now discuss happens about 2020, partly these measures could affect us and then the spread would stay at the con level as nothings happens spreads would go down again. SO, let's not talk about 2020 also at the Capital Market Day, we were very clear about 2018 and 2019. 2018 we are going to see mainly the low because of the realized power prizes coming down further. In 2019, we significant recovery of the result and distributable cash flow, because of the different things we said before and as I said in the last call and I can just reiterate it. We will give new dividend guidance with our full year result presentation in Q1 next year, because then we know also the results of the collision agreement and can have a better assessment of that what would that we have a clear picture on the 2018 and so to expect an update on dividend guidance in Q1 next year. Your second question on EU ETS, I mean we were very transplant and said that lignite, the entire lignite complex for mining and power plant is cash neutral at prices of €22, these prices are defined as base load prices minus CO2 prices, we have the current prices and you know that the carbon intensity of lignite is slightly above 1 ton per megawatt hour and the possible effect of carbon we have in your model. So, you can run your calculation what different CO2 prices would do to the lignite business in terms of cash contribution.

If I basically said a minus €0.4 roughly assuming any intensity of say €0.7 for the past two factor and €1.1 for your fleet, that time maybe 60 terawatt hours or something in 2021, that would sort of gives the overall impact then, but maybe some offset from gas or something running more?

Exactly, because you need to replace it then, yeah, definitely, but this type of calculation is correct.

Thank you, Deepa. Next question please.

[Operator Instructions] We have received the next question from Nick Ashworth of Morgan Stanley. Please go ahead.

Hi, good afternoon everybody. Couple of question from me, firstly this lot of cost efficiency sprinkled through the results to the presentation and Marks I think you talked a little about some on the core. Can you just talk a little about where you are in that program and where that can be developed from and makes it feels like you are little bit ahead of where you are expecting to be? And then secondly, CapEx for the full year ignoring what may or may not happen with the €500 million left over, where direct mine CapEx to be for the full year?

Thanks Nick. First efficiency we said, we going to achieve it, we have at €100 million until 2019, the split is €200 million in lignite and nuclear and the €100 million European power and our assumption is that we are slightly better than one third already at the end of this year. So, we should expect another slightly below €200 million for 2018 and 2019. But it's too early to now discuss whether we are going to setup of another program that also depends on what's going to happen to our capacity overtime and I think it's not worth discussing the next program after having realize the existing one. So, we will discuss that and update you maybe in the second half of 2018, whether we do more or not. On CapEx, our full year guidance was always €350 million to €400 million, this year we expect more and to end at the upper end because of our investment into biomass conversion in the Netherland which is more than pure maintenance CapEx, pure maintenance is around €350 million for the full year.

Very clear. Thank you.

Thank you, Nick. Next question please.

Next question is a follow-up of Michel Debs of Citigroup. Go ahead.

Yes, thank you. Michel again. On the commercial optimization if my number serves me right, you had spoken about middle, double digital uplift to your H1 numbers and you also said that time that this performance was not necessary sustainable. Could you please update us on the performance of CIO over the first nine months of the year and the weather as markets improve you now think that maybe you can carry some of that uplift going forward and permanently get more and next on that activity? Thank you very much.

Thanks, Michel. Yeah, it's still the same number the double million digit number for also the first nine months so Q3 somehow months more or less in line that's what we have seen in the previous years. And I mean the market is more tighter so we expect slightly higher results also in future.

Thank you very much.

Thank you, Michel. Are there any more questions?

Yes. We have the next question [indiscernible]. Your line is now open.

Hi, good morning. Given that you are the majority shareholder of innogy. I'm wondering what your thoughts are on the development in the U.K. retail markets in terms of the deals with and power and also if you could give me some comments on by these thing that would be further consolidation there? Thank you very much.

And please understand that we will not comment on the operating business of innogy I mean we fully support what they are intending to do in the U.K. we are seeing with that the right step for that business, but I will not speculate about retail market in the U.K. that's question for the innogy management please.

Okay. Thank you.

Thank you. Are there any more questions?

Yes. We have a follow-up of Nick Ashworth of Morgan Stanley. Please go ahead.

Hi, thank you. Just turn on your stake I don't think I've heard you talk about it for a little while do you have any views around what could happen with that in time?

Yeah, we still we continue to expect a good dividend from the stake.

And so therefore you are happy to hold onto it for the time being?

Very happy.

Okay. Very good. Thank you.

Thanks, Nick. Next question?

There are no further questions.

Then thank you very much, everybody. If you have any follow-on questions, then do please reach us. Thank you very much. Have a good day. Bye.

Ladies and gentlemen, thank you for your attendance. This call is concluded. You may disconnect now.