Markus Krebber - CFO Gunhild Grieve - Head of IR

Alberto Gandolfi - Goldman Sachs Vincent Gilles - Credit Suisse Peter Bisztyga - Bank of America Merrill Lynch Deepa Venkateswaran - Sanford C. Bernstein Lueder Schumacher - Société Générale

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 2018. I will now hand over to Gunhild Grieve.

Thank you very much. Good afternoon to everyone on the phone and to those who are joining us via webcast on a very busy day of results announcements. I’m joined here by Markus Krebber for the presentation on the first nine months of 2018. We continue to concentrate on RWE’s stand-alone figures, since they are relevant for our financial steering and are also not affected by any changes to the financial reporting until the agreed asset swap with E.ON closes. As always, in order to focus on your questions, we have kept it short. So let me hand over to Markus.

Yeah, thank you, Gunhild, and good afternoon, ladies and gentlemen. Our 2018 nine months figures are fully in line with our expectations. Adjusted EBITDA came down by 23% as expected, mainly due to lower realized generation margins and volumes. Based on this operational performance, we can confirm our full year outlook for RWE stand-alone. Let me remind you quickly that the IFRS figures for the RWE Group have been adapted following the planned asset swap with E.ON. Those activities, which will be transferred to E.ON in the long run, are classified as discontinued operations. This primarily includes the grid and retail businesses of innogy. The outlook we gave in March was amended with our H1 presentation. The revised outlook only reflected the accounting-driven adjustment and not any changes to our expectations for the operational performance. We can confirm the earnings outlook for the IFRS figures as well. Let me say a few words on the current status of the execution of the transaction with E.ON. Joint integration teams made up of colleagues from all companies have kicked-off this, pushing integration planning forward. All-in-all, we are well on track. We will stick to our time plan and from today’s point of view expect merger clearance in summer 2019. We currently do not envisage any material impact from the announcement that innogy and SSE have entered into discussions on adjusting the terms of the planned combination of a UK retail businesses. Moving on to our decision to de-mothball the Dutch CCGT Claus C which has the capacity of around 1.3 gigawatts based on increasing market prices and spark spreads. Bringing the station back online will result in significant value versus keeping it mothballed. We expect that Claus C will reenter the Dutch market in time for winter 2020 and could also be made available for the Belgium market in the future. This will depend on the details of the capacity remuneration mechanism which the Belgium government is planning to introduce and the construction of a new connection to the Belgium grid. Coming to the situation around the Hambach mine. We were surprised by the resolution handed down by the Münster Higher Administrative Court on the 5th of October imposing a temporary stop of the clearance of Hambach Forest. A final decision in the principal proceedings should be reached at the later date possibly by the end of 2020. A litigious point of the proceedings deals with the question of whether the Hambach Forest is subject to the protection regime for potential flora, fauna habitat areas. An earlier ruling in another case dealing with the same question was already in our favor. We are therefore confident of our legal position. Nevertheless, the temporary stop to the clearance hasn’t impacted. Based on current expectation, production volumes will decrease by roughly 9 to 13 terawatt hours per annum in the period 2019 to 2021. The financial impact on our EBITDA for this period amounts to approximately €100 million to €200 million per annum. The main task is now to optimize operations to keep the burden as low as possible. The Commission for Growth, Structural Change and Employment has continued its work over the last few months. As reported in the press, the Commission met regularly to gain insight into various special topics in relation to the energy system and the lignite regions. At the end of October, they finalized the interim findings and recommendation for measures to support the social and structural development in the affected regions. By the end of November or the beginning of December, we expect to see their recommendations on climate goals. These proposals will be more relevant for us than the chapter on structural development as it will provide some details on the recommended magnitude and speed of the coal phase-out. As a reminder, the Commission was tasked to identify measures which supports structural change and development in the affected regions, ensure the treatment of the 2030 CO2 reduction target and close the gap to 2020 climate goal as quickly as possible. In addition, it should set a date for the final shutdown of coal-fired power generation. As a sign that the coal phase-out is already on its way is the fact that we transferred two additional lignite units, Niederaussem E and F with a capacity of 300 megawatts each into the security reserve at the end of September. They will remain there for the next four years before finally shutdown. This was agreed for climate protection reasons in 2016 and RWE will contribute 1.5 gigawatts to the lignite reserve from 2.7 gigawatts in total. Slide 4 shows the development of our adjusted EBITDA. For RWE stand-alone, adjusted EBITDA came down by €400 million and amounted to €1.3 billion which is mainly a result of lower realized margins and lower generation volumes in the segment lignite and nuclear. The adjusted EBITDA includes the innogy dividend of €683 million which we received at the end of April. Looking at the outlook for the full year, we confirm our guidance for adjusted EBITDA to be between €1.4 billion and €1.7 billion. Slide 5 provides the details of lignite and nuclear. Adjusted EBITDA amounts to €240 million for the first nine months. The earnings decline of some €300 million for adjusted EBITDA is mainly driven by lower realized generation margins and volumes. The reduction in volume is primarily a result of the closure of our Gundremmingen B nuclear unit at the end of last year. We are looking forward to a strong fourth quarter and expect adjusted EBITDA for the full year to be between €350 million and €450 million as guided. The European Power division realized an earnings decline of €90 million. Adjusted for nonrecurring items, it nearly reached the level in the corresponding period of the previous year. Our hard coal and gas plants realized lower margins. However, a positive effect came from income from the UK capacity market. For 2018 as a whole, we confirm the outlook with an adjusted EBITDA contribution of €300 million to €400 million. In contrast to our outlook for FY 2018, we now expect income from commercial asset optimization to be roughly in line with the high previous year’s figure. Nevertheless, this is offset mainly by a stronger than expected earnings decline due to outages. This brings me to our current hedge position on Slide 7. Average hedge prices for our outright position in '19 to '21 increased compared to the level we reported in H1. The increase of plus €4 per megawatt hour in 2021 is mainly due to an increased hedge ratio from 40% to 60%. Additional hedges were concluded at market prices which were significantly above the average hedge price. The presented figures are as 30th of September, so the impact of the temporary stop to the clearance of Hambach Forest is not reflected here. As mentioned at the beginning of my presentation, we currently assume a decrease of some 9 to 13 terawatt hours per annum in '19 to '21 for outright generation. Let me also remind you of our long-term carbon position which we have financially hedged through until the mid-2020s. In other words, the change in carbon prices should not affect our generation margins in this time period. On Page 8, you can see the development of fuel spreads until the end of September '18, which are relevant for our hedge prices you saw on the previous slide. Fuel spreads showed quite a volatile development, but recovered towards the end of September. Let’s move to supply and trading on Slide 9. We again saw a good trading performance in the third quarter. Furthermore, our gas and LNG business posted a good performance even if it lagged behind the very high results of last year. Besides, we had a negative effect from the value adjustment within our principal investment portfolio in Q2. For the full year, we confirm our earnings expectation for this division of between €100 million to €300 million. Ladies and gentlemen, Slide 10 provides the earnings drivers down to adjusted net income. Our adjusted net income amounted to €645 million in the first nine months of 2018 compared to €930 million in the same period of the previous year. The decline in adjusted EBITDA was partly offset by an improved adjusted financial result. Besides a typical adjustment for the non-operating result in the corresponding taxes, we have mainly corrections in the financial results driven by the mark-to-market valuation of securities and of the new IFRS 9 rule and the deferred taxes. The latter are timing differences mainly caused by derivatives and can be quite volatile in line with this volatile development of the derivatives. Now onto our distributable cash flow on Slide 11. In the first nine months of the year, distributable cash flow amounted to approximately €600 million compared to approximately €490 million last year. This was the result of the positive development of change in provisions and other non-cash items, as well as changes in operating working capital. Change in provisions and other non-cash items improved by approximately €240 million and is mainly driven by lower utilization of provisions for legacy contracts. We expect this to reverse to some extent in the fourth quarter. All-in-all, we now expect change in provisions and other non-cash items to end slightly below our originally guided €650 million. Change in operating working capital was also much better than the comparable period last year, despite an increase in inventories due to higher gas prices. The main reason is the phasing out of working capital optimization measures last year. For the fourth quarter, we expect a positive change in working capital due to a typical decrease of gas inventories. Hence, we confirm our expectation to end this year with a positive balance. The details of the development of net debt are shown on Slide 12. At the end of September, net debt stood at €2.1 billion, approximately €2.4 billion lower at the end of fiscal year 2017. This mainly results from changes in variation margins which will revert once the underlying transactions are realized or commodity trends turn around. Due to the volatile nature of variation margins, we maintain our outlook for net debt at moderately below end of 2017. Now onto our RWE stand-alone earnings outlook for 2018 on Slide 13. As already mentioned earlier, we can confirm our earnings outlook for the year as well as the target to pay a dividend of €0.70 for fiscal 2018. With this, I conclude my remarks. And we are now happy to take all your questions. Gunhild, please.

Thank you, Markus. So let’s see how many questions there are. Operator, if we could have the first one please.

Yes, sure. The first question is from Alberto Gandolfi of Goldman Sachs. Your line is now open. Please go ahead.

Hi. Good afternoon, everyone, and thanks for taking my call. I’ll stick to the two question rule. The first one is about Hambach lignite situation. The question here is considering the coal commission outcome is expected sometime in mid or early December and the government is going to rule next year. But the court case on Hambach may protract into 2020. Is there a chance to voluntarily use as a sacrificial lamb Hambach as a first – effectively 4 gigawatt of lignite to be decommissioned sometime maybe by 2020? And if so, would that be eligible for stranded costs or compensation, because we are seeing that in the 80s when the Spanish were stopping nuclear, plants were being built. They received a moratorium. We are seeing EDF with [indiscernible]. So I wonder why would for German legislation be treated differently any closure of coal or lignite? Second question is on renewable medium-term growth. Yesterday, innogy told us there is a more than 1 gigawatt of projects under construction or advanced development stages for the next two years. And E.ON also gave some indications about repowering, how much they are building. It would appear that you would be on track before actually thinking about offshore to deliver 700 megawatts or about 1 gigawatt per year of annual additions if I just add up those figures from the separate activities. Do you think that’s a crazy assumption to have going forward? Thank you.

Thank you, Alberto, for the questions. But I think I have to disappoint you quite a bit with my answers. First, I need your acceptance that I cannot speculate about the Hambach mine and discussions about the Commission here in the public call. So we are now patiently waiting for the recommendations of the Commission and then we’d take that topic from there. Of course, you can be assured that we look into all potential scenarios which could be the outcome of any of these cases and to find the optimum for RWE under all circumstances. But the point you are making on compensation is definitely a very valid one. The Commission has already said clearly that they don’t want to see any socially unacceptable layoffs and that definitely comes at cost. So I read this as an implicit assumption that somebody else in the companies have to pay for it, because we would always do it in a manner that is of course the best for the company. And on the other side, if there is a clear interference with existing legislation and company assumptions on investments, then that should also come with the compensation that was always our understanding. It is now supported by two, three very strong legal opinions which were published and also we all have the experience on the nuclear side where it took us to the cost. But for the fund, for example, the government already decided to go for a contract with the company and we probably can expect something similar on the coal side. On renewable, I have the same public information that you have on the innogy and E.ON renewables and I cannot comment more than you get from these companies.

Thank you.

Thank you, Alberto. Next question, please.

The next question is from Vincent Gilles, Credit Suisse. Your line is now open. Please go ahead.

Yes. Good morning, again, everyone – afternoon actually in my case. Two questions. The first one is on Hambach. Markus you mentioned end of 2020. Can you remind us why this is sort of hard stop date? What is going to happen in between, between today and in two years time? Not so much what you can do but from a legal point of view what you could do and why end of 2020? And second question is on current situation in Belgium. You mentioned Claus C coming back but by then, let’s hope for the Belgians they’re going to still have power. How much do we see in your Q3 numbers and potentially Q4 guidance the reflection of higher power prices in this neighboring country? Thank you.

Thanks, Vincent. On Hambach, the 2020 timeline is not a linear one. So we have two different cases where the injunction could go away. One is, if we see a decision on the main proceeding by the Higher Administrative Court in Münster. And one of the proceedings is with them. There is currently no expectation when that happens. It could even happen in 2019 but it could also take until 2020. And then other rule is whenever you have new facts and the new facts could also be a decision by the court in Cologne on the other case, or other new facts on the protected area whatever. Then you can ask the court to revisit the injunction. So there are many, many legal rules which could lead to a different result or an earlier one or even a later one. Our assumption was now a conservative one, because we needed to optimize the mine with best case assumption. So there is no linear path to this legal decision by 2020, because there could be many, many different rules. But our current assumption is that that could take until 2020 and we are now optimizing everything with this assumption.

Okay. When you mentioned the court in Cologne, does it mean you have actually started the proceeding in Cologne Administrative Court or whatever court?

No, the situation is the following. We have two ongoing court cases. On this main question about flora, fauna habitat, we already had one decision by the Cologne case. This was disputed or contested by the BUND and this case is now in Münster already on the same question. And then we have another case on another permission again on the same topic with the Cologne case. So we can expect a decision by the Cologne court probably in the next year. And the timeline on the Münster court where this legal proceeding is already pending for most of the year and even be expected next year or 2020. So there are two different cases. One is on the framework plan. One is on the short-term operating plan. So on two different plans and permissions, we have cases on the same main topic.

I get it.

And then on Belgium, Claus C will come back as I said in 2020. And you’re question was referring to the short-term situation. Of course, tighter market and higher power prices are affecting especially the open spread position and the reserve markets. But especially the situation on Belgium since the interconnected capacity is always fully used and importing into Belgium at maximum, additional price increases into the Belgium market has a very minor effect on the neighboring countries.

Thank you very much.

Thank you, Vincent. Next question, please.

The next question is from Peter Bisztyga, Bank of America Merrill Lynch. Your line is now open. Please go ahead.

Good afternoon. Just a question on your hedging please. So according to my sort of Bloomberg screen, actually spreads have continued to improve since the beginning of the fourth quarter. I was wondering if – I’d be interested in your thoughts as to what’s driving that recovery in spreads. And also if you were to mark-to-market today, would that imply further upside to your hedged prices that you’ve disclosed at the end of the third quarter? And then a second question just to follow up on timeline of these court cases. Do you [indiscernible] to date factor anything in for the possibility that there could be another appeal at the Higher Administrative Court in [indiscernible]? So again, there could be another injunction during that process?

Yes. Thanks, Peter. Let me start with the latter. I think since it’s all over the same topic and the topic is whether this remaining little forest is a fauna, flora habitat area. An additional injunction on the other case would not make any difference. I think what we need is a decision on the main proceeding which is the decision whether it’s flora, fauna habitat area. All our legal assessments say we have a very strong case. We have not seen in Europe that after this list was closed that a new area was declared flora, fauna habitat. We even have an environmental assessment and all headed into the courts and this – and would never have been one flora, fauna habitat area. So the only thing we are awaiting is the final decision in the main proceeding and then the topic should be solved for us. The unpleasant one is the injunction that we have to wait for that. On hedging, just to get the question right, the second part of your question was whether we would benefit mark-to-market from the higher prices. What you meant there was the development in Q4, right?

Correct, yes.

Yes, I can confirm that spreads recovered even more in Q4. And all things being equal by now we would see a significant positive effect also in our mark-to-market of the hedges and by that increasing hedging prices. The question what drove that, I think I’ve made many times clear that we thought spreads were undervalued so that we see a fundamental undervaluation of the market. And that’s why we kept the position open. And we usually see that going away when it comes to physical delivery. But I think what also drove prices, especially '21, was the first rumors of what the potential Commission could do. And that’s not my speculation but what you can read is discussions around 7, 8 gigawatt of closures in the early '20s which was the same number we had under the Jamaica coalition talks. And if you go back on our slides, you can see exactly what the effect was on spreads during that coalition talks. And more or less prices are back to the same level now.

Great. Thank you.

Thanks, Peter. Next question, please.

The next question is from Deepa Venkateswaran of Bernstein. Your line is now open. Please go ahead.

Thank you. So my two questions; so on the CO2 hedging, Markus, maybe I heard wrong but I think you said that your hedged until the mid 2020. I think previously the data that you said is 2022. So I just wondering whether I just misheard something or is there more, i.e. you’ve extended your hedging period. And second question on the whole coal closure, so there have been some new reports made by the NGOs asking from an even more aggressive phase-out of like 16 gigawatts by 2022 of which roughly half and half lignite and hard coal. So I was just wondering whether in your assessment something like 7, 8 gigawatts of lignite closing by 2022 would actually be possible socially, technically and what your expectations would be if you had to put your fair share in a compensation scenario?

Yes. Deepa, thanks for the questions. The first one I can confirm. Yes, you heard it right. We have extended our CO2 hedging. We always said in the last call that we did more after 2022 and I think now we can confirm it mid-20, and of course mid-25 is a good translation of it. So we have extended that. And on the coal closures, this recent report there are many, let’s say, environmentalists in the coal commission and more than these three. So only three of them were behind this kind of proposal to close 16 gigawatts and half lignite, high coal. And as I said to first question, that’s why I don’t want to speculate. But I can clearly tell you that this number is totally impossible from point of views; socially not acceptable, security of supply, power prices. So I don’t take it serious.

Okay. Thank you.

Thank you, Deepa. Next question, please.

The next question is from Lueder Schumacher, Société Générale. Your line is now open. Please go ahead.

Yes. Good afternoon. Also two questions from my side. The first one just on your Page 7, as always, the hedges. You have seen quite a big increase in your 2021 average achieved price from 29 to 33. However, if you work out at what level you sold the additional 20% of the output at, you get to 42 which is below where base-load prices were trading during Q3. It’d be great if you could explain the difference to us. The second one is on your net debt. Obviously, your net debt has benefitted a lot from the variation margin which is due to your carbon position. Could you maybe help us to get an idea of how much of the carbon-related fall in net debt is due to a carbon position where positions will be closed by the end of this year so we can arrive at a sort of clean net debt number that is reflective of unit debt and not some kind of commodity positions that will reverse upon delivery?

Yes. Thanks, Lueder, for the questions. I don’t know whether I got the first one correct or it’s not possible for me to calculate the 42 you derived. I think it’s better that we come back --

Yes.

Also with a back up and we clearly tell you what drove it. It’s also – of course, part of it was conversion into a spread position. So fuel price developments are – we will come back and expand it in detail. On the net debt figure, yes, of course it’s a mixture of carbon price movements but also power and other commodities. A clean net debt figure is very difficult to derive because it also depends on what in the end is the additional generation margin you’re going to earn in the following year because your hedging was right. But we have already spotted the problem to get a right interpretation of the net debt, but I have not yet a solution to that.

But you will get one by the end of the year.

We think about it. We acknowledge that it’s important for you to have a real net debt figure to do an equity valuation, but we need to give it more thought.

Okay. Thank you.

Thank you, Lueder. Are there anymore questions?

We have a follow-up question from Deepa Venkateswaran of Bernstein. Your line is now open. Please go ahead.

Thank you for taking my follow-on questions. So I had two questions. Yesterday, Uniper reported in their midstream division that they’re seeing – that they’re booking some provisions for arbitration on the gas side. I was wondering whether you have any such legacy issues, or is your gas portfolio largely tedious [ph]. And secondly, maybe you won’t answer this question. I was just wondering on the npower-SSE deal if it falls through, doesn’t go ahead, would it have any implication on RWE.

Yes. Thanks for the questions. No, we currently don’t have any ongoing or upcoming proceedings with regard to gas supply. We solved this topic by bilateral negotiations with some suppliers a couple of years ago for the years to come. So you should not expect anything in the future there from our side. We deem that problem to be solved. On the npower-SSE side, we had already in the contracts with E.ON thought about all potential scenarios and eventualities and it’s all taken care of. The important thing was the merger clearance, because since the merger clearance for the SSE-npower merger was achieved, it also means that from a UK competition authority point of view a potential combination of E.ON and npower would not pose any problems. We had integrating into the contract some stop agreements to help on that, but that is actually not needed. So if the deals go ahead or if the deal falls apart, there is no issue. And so by that no impact on RWE from the contractual agreements we have with E.ON.

And then you’ll go [ph] for revaluation or repricing or anything of the overall deal?

No. That only applies to the assets we get from E.ON and innogy, but not the innogy underlying business.

Okay.

Thank you. Anymore questions?

There’s another follow up from Vincent Gilles of Credit Suisse. Your line is now open. Please go ahead.

Yes. Thank you. About two hours ago the same happy crowd of analysts were on the phone with E.ON and one of us asked the obvious questions regarding the production rights and the fact that they need to find some nuclear volumes in one to two year’s time. You’re the natural, I would say, counterparty for a negotiation. Is there any way you can give us a bit – an update on what maybe happening on that side and confirm the amount of production rights that you still have on your book with, if my memory is correct [indiscernible] all these older stories? Thank you very much.

Actually there is no news on potential negotiations or anything like that. There is still some time since we need to find an agreement. Of course, what we are doing because that is part of the compensation law which there is an obligation that we try to find buyers. So we are offering our protection rights. And of course it may be too early to find an agreement because E.ON still has some time to buy. So no news from last call. And I can confirm that we have around 27 terawatt hours of production rights which we will use ourselves. Already deducted what we are going to need for the minorities we buy from E.ON.

Very clear. Thank you.

Thank you, Vincent. Are there any more questions?

There are currently no further questions. [Operator Instructions]. We haven’t received any further questions. I hand back to Gunhild Grieve.

Thank you very much, everybody. And I think we will see many tomorrow at the sell-side lunch and throughout the next few weeks on the road. Thank you very much. Bye.

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