Earnings Call: Q4 2013

Mar 4, 2014

Welcome to the RWE conference call on the business performance for RWE's fiscal year results 2013 with Peter Terium and Bernhard Günther. I will now hand over to Stephan Lowis. Yeah. Thank you. Good afternoon to everyone who has joined us today via telephone or webcast for our results presentation for the fiscal year 2013. I am joined here by Peter Terium and Bernhard Günther. The title of our presentation, Focus on Financial Strength, is unchanged because this is still the main focus for RWE. However, we would also like to share with you how RWE's business profile will develop over the midterm. Peter will focus on this in his part of the presentation. Afterwards, Bernhard will give an overview of our 2013 business performance and major earnings drivers post 2013. With this, I would like to hand over to Peter. Oh, thank you, Stephan, and good afternoon from me. Let me start with a brief review of 2013. We ended the year in line with our expectations for EBITDA operating result and recurrent net income. However, to reflect the challenging market environment, we recognized a significant impairment on our assets and detached goodwill, mainly in our conventional power generation business, which led to a negative net income. Otherwise, our performance was marked by two major opposing factors. On the one hand, the deteriorating electricity generation margins, including the full auctioning of CO2 certificates, burdened our generation business. On the other hand, the successful revision of our gas procurement contract with Gazprom resulted in a compensation payment of approximately EUR 1 billion. In August, we finalized the sale of the Czech gas transmission company, Net4Gas, thereby deconsolidating the business for the remainder of the year. This year's earnings also be impacted by the disposal. I am very pleased that our efficiency improvements are progressing well and ahead of schedule. The group has achieved some EUR 250 million more in efficiencies than envisaged for the year. This is partly due to the fact that cost saving is becoming a matter of course to the business, and I am proud of that. In June, Moody's lowered its long-term credit rating from A3 to Baa1, thereby bringing it in line with S&P's rating. The outlook was raised from negative to stable. Finally, we can confirm our outlook for 2014 given in last November. Bernhard will provide you with the details on the divisional outlook and its major drivers. I would like to spend a little bit of time around the midterm development of RWE. This is, of course, important for me and my fellow board colleagues, especially in the context of the currently changing and challenging market conditions. Let me now share our midterm direction with you. For this purpose, we should have a closer look at RWE's earnings development, which you can see on slide 4. The headline already contains my main message. RWE is more than just a generator, or to use the old metaphor, a one-trick pony. We carry a very attractive downstream earnings stream, which is becoming ever more important to us. In the medium term, we expect between 40% and 50% of our total profits to come from regulated activities. Unfortunately, this comes mainly as a result of the shrinking generation business and therefore an overall lower level of earnings. I think the market is partly too focused on this part of our earnings, forgetting about the non-generating business. However, this does not mean the conventional power generation won't be part of RWE's future. On the contrary, we will remain an integrated utility, but with a much bigger focus on our downstream activities. This is also where we see opportunities to be an active participant and driving force in the transformation of the energy market. Conventional generation can offer an attractive upside should markets improve again. But this is not a given since we cannot control commodity prices, nor do we see any clarity on the political front for a new market design. However, we see a kind of bottoming out in German wholesale power prices at the moment, but this is clearly dependent on hard coal prices. Coming back to the graph on the slide, we expect the generation business to contribute not more than 5%-10% to the group's earnings midterm, coming from half of the group's earnings in 2012. As outlined last November, at current forward prices, the generation business would be earnings negative were it not for major efficiency measures currently being implemented. Against the backdrop of falling generation earnings, our downstream business becomes more important, and with it, the portion of our regulated business, which provides a good degree of stable and predictable cash flows over the coming years. This part of the business was always there and important to us, but certainly less visible to the capital market over the last few years. And this brings me straight to the next slide, illustrating RWE's midterm business profile and its main earnings drivers. A very important business, as well as earnings contributor, will be the regulated distribution business. In Germany, we have regulatory certainty until 2017 for gas and until 2018 for electricity. We see some potential for growth arising from the energy market transformation, as well as efficiency improvements and performance. In Central and Eastern Europe, we operate distribution networks in four countries. Our main objective is to stabilize earnings against regulatory downward pressure, which is particularly strong in Hungary. In the Czech Gas distribution business, we are in intense discussions with the energy regulator on the parameters of the fourth regulatory period, scheduled to start in 2015. Significant effort is also being invested into operational performance and optimization. Our supply business is focusing on earnings improvement through efficiencies and innovative products. While this business certainly sees competitive pressure as well as regulatory scrutiny, as can be observed in the U.K., new products and cross-selling provide opportunities to grow earnings. Since the beginning of this year, we have bundled our retail competencies in a new management unit, which will be responsible for the group-wide retail business. On the generation side, we have RWE Innogy working on meeting their cost of capital by 2016. This implies finalizing the two large offshore wind farms currently under construction, divesting non-core activities such as biomass and offshore construction vessels, as well as improving overhead costs. We will continue to pursue selective growth opportunities. More on that in a moment. The conventional part of our generation business will be concentrating on the profitability of the fleet, with the main focus being on cash flows. In this context, RWE Generation is following the clear goals of not burning cash, contributing to earnings, and optimizing the portfolio. Upside potential could then emerge from either a rise in power prices or the introduction of a new market design. The trading activities will continue to be an integral part of RWE as the interface to the traded wholesale market. RWE Supply & Trading is responsible for the commercial optimization of RWE's asset base. Further, the trading business develops growth opportunities in new trading markets, both in terms of new regions and energy-related products. It also targets additional profits from principal investment activities in energy-related projects. After the arbitration court ruling last June, we have come to a commercial settlement with Gazprom last week. We cannot comment on details, but under the agreement, we expect no further negative impact from this long-term gas supply contract on our accounts until the next regular price revision in summer 2016 can be triggered. Until then, we are confident to find an amicable solution for the open issues so that the whole gas-to-oil spread problem is solved. However, RWE Supply & Trading is currently losing money from historically contracted long-term gas storage capacities due to the low summer-winter spreads, which do not allow us to earn the capacity payments. Therefore, we see the underlying earnings potential of the division more in the order of EUR 200 million for the time being. I would now like to come back to our two generation businesses and explain in a little bit more detail what we are trying to do here. In November last year, we showed how the conventional power generation would have fared in 2013 at current forward prices. Of course, the actuals came out better since we still benefited from higher power price hedges. Our average realized baseload price was EUR 51 per megawatt hour. Going forward, this will obviously come down towards the current forward price. The hedge profile for our baseload volumes currently stands as follows. For 2014, more than 90% is hedged at approximately EUR 45 a megawatt hours. For 2015, more than 60% below EUR 45 a megawatt hour, and for 2016, more than 30% below EUR 40 a megawatt hour. While the genco is working harder measures in order to provide a positive earnings contribution, first and foremost, it is focusing on not becoming a burden on cash flows. Since the business has quite a significant depreciation schedule, which of course is not cash relevant, it is still an important contributor to RWE's cash flows and will remain so over the coming years. Clearly, the business must ultimately earn its cost of capital again, and although we are restructuring the business to move in that direction again, we eventually also need the market to reimburse backup capacity, either through higher power prices or a change in market design. We encourage policymakers to initiate the first steps of implementation to just design and legislation process as quickly as possible. However, this is about the long-term viability of the market framework. Hence, we do not expect any commercial effects to materialize in the short term. In terms of portfolio measures, let me provide you with a short update on where we stand. Based on the regular reviews of our power plant portfolio, we decided to mothball further capacity. The few operating hours combined with the low wholesale prices have made the operation of Claus C, one of our most modern gas-fired power stations, unprofitable. Unit A had already been mothballed at the beginning of last year. In addition, we have decided to reduce our contracted hard coal capacity by another 1,000 megawatts. As part of the overall efficiency program, these portfolio measures minimize the negative cash flow contribution of the portfolio while keeping some of its optionality. Further capacity remains under review, and we will update you once the concrete decisions are taken. Moving on to our renewables generation business, we see a much more positive trend. While we had to revise down our 2014 outlook, we are confident that from next year onwards, RWE Innogy's operating result will start to progressively grow on an annual basis. This is despite cutting back on CapEx. So where is the growth coming from? First, our two large offshore wind projects, Gwynt y Môr and Nordsee Ost, have crossed the halfway line and will come online with all turbines by year end 2014 and mid-2015. Second, we are still investing in growth projects, albeit on a very selective basis and through partnerships to reduce our capital requirements and diversify risk. Third, the business is also working on restructuring and efficiency measures to ensure it earns its capital costs by 2016. Ladies and gentlemen, at our Q3 results 2013, we presented our next wave of efficiency measures, which should have contributed at least to EUR 500 million to operating result by 2017. These came on top of the EUR 1 billion planned by the end of 2014. I am very pleased to say that we have already achieved EUR 1 billion net benefit to our operating result by the end of last year, and that we are very confident that we will be able to deliver the total EUR 1.5 billion by 2016, one year earlier than initially envisaged. While I am very proud of the company's ability to raise efficiencies, unfortunately, the pressure on the business is not easing by any means. On the contrary, the EUR 250 million net benefit delivered in 2013 above plan were mainly offset by a negative one-off in generation and the weaker than expected trading business. They are one of the drivers in the positive development of our cash flows. We cannot rule out that further competitive and regulatory pressures eat away some of our efforts. This means that we have to continue to work hard to find additional efficiency measures, and we are already planning further ones. However, it is too early to talk about those. Looking now at where the improvements to operating results are coming from, it is probably no surprise to you that conventional power generation accounts for approximately half of it. Do not forget that the main reason for bringing all of our generation assets under one roof was to enable us to raise efficiencies and reduce costs. Measures include staff reductions in management and support functions to bring down overhead costs, lowering of O&M costs, and improvement of the availability and flexibility of our power plant fleet. Our German downstream business contributes some 20%. In the regulated grid business, the focus remains on more efficient operations and regulatory outperformance. As an example, this can be achieved by optimized investments in the grid, which reduce future O&M costs, while simultaneously increasing the regulated asset base. The sales business concentrates on reducing costs through leaner processes and growing revenues and margins through innovative products and advanced customer service. In the U.K., npower continues to work on improving its customer service levels and cost structure, including outsourcing some customer support activities as well as tighter control of central overheads. This will lead to substantial cost savings over the next years. In terms of customer service, npower is on the way to fixing the underlying issues that have led to poor customer service performance, and we expect to see significant improvement during the year. Our trading and gas midstream business contributes some 10% to the overall program. We streamlined the organization by consolidating support functions into the main locations. Further efficiency measures are mainly focused on the optimization of our IT infrastructure, the consolidation of our application landscape, and an improved sourcing strategy. The holding, other divisions, and consolidation effect account for the remaining 10%. Key initiatives here include the implementation of a new steering model for the group with a significantly reduced management holding, shared service centers for transactional processes, and centers of expertise for bundling services with focus on expert knowledge. Further to that, we plan to harmonize our IT equipment. On slide 11, we have outlined how the efficiency enhancements impact our total controllable cost base. In 2012, total controllable costs stood at EUR 10.8 billion, of which EUR 5.3 billion accounted for personnel costs. By 2016, we see them go down to EUR 9 billion. Adjusted for portfolio and other effects, such as the expected sale of RWE Dea, the operational cost savings amount to EUR 0.9 billion, representing 60% of our total efficiency program. You might ask now where the other improvements are coming from, if not from cost reductions. The reason for calling it an efficient enhancement program is that some measures focus on raising revenues and margins with the same cost. Let me give you a concrete example. The generation business was able to increase the output of our lignite fleet by approximately 3 terawatt-hours by improving its availability. This was partly achieved through better management of different coal qualities and the process optimization leading to shorter maintenance outages. That is. Okay. Before handing over to Bernhard, let me also make one little remark about our internal management agenda. As laid out to you, the current main focus is on cost-cutting and efficiency enhancement. I guess that came across very clearly in my presentation. We are not laying back and saying we will work through our programs, and once they are finished, we start to go back to find new ideas to grow the businesses. It is just the opposite. We are already very much focusing on innovation and new products. We have spent a significant amount of time with our top leaders over the last several months to generate new ideas to grow the business along our value chain. I am pretty sure that this will ultimately lead to future growth. Before we present our ideas to the capital market, I think we have to do some more work to get them ready to launch. This will take a little bit more time, but don't expect us to change our value chain or our geographical footprint. Neither will happen. I guess this is also a positive message for you. I would like to hand over to Bernhard. Yeah. Thank you, Peter, and good afternoon from me as well. Let me give you a brief overview of the major aspects of our business performance in fiscal 2013 on page 14. Our operating result was down, as expected, to EUR 5.9 billion. We have two main opposing effects. On the one hand, our trading gas midstream division achieved an extraordinarily high result. This was due to the arbitration court ruling on our long-term oil index gas contract with Gazprom. On the other hand, we suffered a massive earnings decline in our conventional power generation division. Here, the new CO2 regime and decline in generation margins were the main drivers. Despite the strong earnings decline in this division, there are positive signs. Peter mentioned already that we are ahead of our plan with our efficiency enhancements. The box on the right-hand side of slide 14 shows a net benefit of EUR 800 million. This compares to our original expectation of just EUR 550 million in 2013. We had early achievements, mainly in our conventional power generation division. One reason is the sustainably higher availability of our lignite generation fleet that Peter explained earlier. In addition, we benefited from higher staff reductions. By the end of 2013, we stand at a group-wide operational staff reduction of approximately 4,500 since the start of the program. For 2013, this means approximately 900 more than originally planned. In addition to the aforementioned trends, earnings in our upstream gas and oil division were under pressure. We suffered from the weaker U.S. currency as well as lower realized gas and oil prices. In addition, we had burdens from dry wells and delays in ramping up our production. The reconciliation to net income on slide 15 is dominated by the impairments we accounted for in the course of the year. All in all, we recognized impairments in the non-operating result of approximately EUR 4.8 billion, which include a goodwill impairment of EUR 1.4 billion. The asset impairments of approximately EUR 3.4 billion mainly relate to our Dutch conventional power generation portfolio. This massive value adjustment led to the first loss in the last 60 years of RWE's history. Although we show a negative net income, taxes amount to nearly EUR 1 billion. This is because the high extraordinary value adjustments are not tax-deductible. The one-off effects within the non-operating result are adjusted for in the reconciliation of our return net income. Therefore, the tax rate for return net income comes in at 34%, similar to last year. Let me briefly touch upon our cash flow statement on slide 16. The cash flow from operating activities shows a strong increase of some EUR 1.4 billion. This is above all due to the one-off from the Gazprom arbitration ruling. One reason why the cash flow shows a more positive trend than our operating result is the development of commodity derivatives. A change in value of commodity derivatives is not fully cash relevant. In 2012, we saw a much more positive impact from such changes in our operating result than in 2013. As part of the change in working capital, we had a tax prepayment of approximately EUR 1 billion. This negative trend in working capital was nearly offset by positive effects from capital efficiency efforts to optimize working capital. Slide 17 gives an overview of our net debt situation. One of our prime targets at present is to improve our balance sheet situation. Let me emphasize again our priority. Excellent access to debt capital market is the key criterion for us. At present, this is possible at a leverage ratio of 3.5 times net debt over EBITDA, which we had in the last couple of years, and we expect this to be true even at higher level, which we expect for this year. Good examples are the recent bond placements. At the beginning of February, we stepped up the October 2037 private placement by another good EUR 60 million. The yield was 3.8%, and the total amount of this placement is now EUR 500 million. Shortly thereafter, we stepped up the January 2024 bond, where we placed EUR 300 million at a yield of 2.75%. Of course, there's no guarantee that the financial markets remain as favorable as they are at present. Therefore, we are sticking to our ambition to bring down the leverage factor to a maximum of 3.0 times. We have our bundle of measures in place, which will start to bring down our indebtedness from next year on. There's a second important fact I would like to remind you of. Our net debt is made up of two different positions, net financial debt and long-term provisions. Net financial debt is much more relevant for short-term refinancing needs than the long-term provisions. The latter have durations of 15 years and longer, partly for decades. They are mainly driven by the change in discount and escalation rates, which are a result of macroeconomic effects. As you can see from slide 17, we were already able to bring net financial debt down to approximately EUR 11 billion from EUR 13 billion the previous year. This is also why we see some flexibility in how fast we achieve our targeted 3.0 times net debt to EBITDA. As it is an important target to bring RWE back on a sustainable leverage ratio, the supervisory board has decided to add this component as an additional factor to the variable compensation of the management board. Please let me emphasize, this is not meant to shift the focus from long-term value creation to pure deleveraging. There is no contradiction between the two, as value creation and deleveraging go hand in hand. Now on to slide 18. To sustainably improve our leverage situation, we are targeting a positive cash balance from 2015 onwards. By then, investments and dividend payments will be covered by our operating cash flows. We are already well on track. While in recent years the deficit was between EUR 2.7 billion and EUR 3.8 billion, we reduced it to EUR 0.4 billion in 2013. Of course, on the one hand with the help of the one-off payment from the Gazprom arbitration ruling, on the other hand, we paid EUR 1 billion to the tax authorities in light of a tax audit. Let me now come to the outlook for 2014. Slide 19 repeats the outlook for the group, which we provided on our conference call in November. It is still valid. Let me remind you, as long as we haven't a clear view on the disposal timing for DEA, we include it in our guidance for the time being. The expectations for EBITDA, operating result, and recurrent net income are mentioned on the chart and haven't changed either. Slide 20 gives the divisional outlook. I think the general trends are not surprising. Therefore, I want to keep my presentation short and refer to the annual report where you can find all the details. Slide 21 provides the major value drivers for 2014 compared to 2013. I mentioned already the general trend of declining realized electricity generation margins, the absence of the Gazprom payment in 2013, and the dilution effect from the disposal of natural gas. The negative trend will be partly offset by efforts from our efficiency improvements. Peter has updated you on the current situation and the fact that we are already ahead of plan. For 2014, we now expect to achieve approximately EUR 150 million of net benefits. Let me finalize my comments with a general view on the midterm earnings trend on slide 22 without giving an explicit guidance beyond 2014. Within this context, we also made our trust statement for 2014 in our November conference call. It led to intensive discussions and calculations in the market, so let me add some clarification in that respect. First, it should be stressed that we are talking on a like-for-like basis, so 2014 earnings level excluding RWE Dea. But this effect is less of relevance for the bottom line earnings. Second, the statement did not imply a sharp recovery in earnings post-2014, but rather a stabilization on that lower level over the midterm. You might remember that we called it the new normal. Third, the generation business on the one hand is becoming an ever smaller earnings driver in the overall group. On the other hand, the downstream and renewables businesses are providing a more stable base and small but reliable growth going forward. Again, this is not a guidance, but how we see the general trend going forward. This concludes my remarks, and we are now happy to answer your questions. Stefan, please. Yeah. Thank you, Peter and Bernhard. With this, I would like to open up the stage, but with mentioning again my famous two questions rule only. Please, operator, start the questions. The first question comes from Mr. Vincent Gilles, Credit Suisse. Please go ahead. Yes. Good afternoon, everyone. Thanks for taking my questions. First, very simple question is on depreciation. After the EUR 3.4 billion of fair value adjustment, can you help us estimate the impact on D&A? I know it's a bit early maybe, but I'm interested to see you do not change your guidance despite the fact that your D&A should go down on a like-for-like basis. The second question is on DEA. Interestingly enough, unless I missed part of the call so far, you did not mention the disposal of DEA, but it's still very much at the forefront of investors' minds. So can you please give us an update and maybe if you talk about DEA, maybe you can talk about Urenco as well. Thank you very much. Yeah. Hello, Vincent, this is Bernhard. I will start with the depreciation question. You are right to assume that the depreciation on a like-for-like basis will be lower post the impairments, and the order of magnitude is roughly EUR 100 million. Yes, and thank you for asking for DEA. We did not mention it because there is nothing new to mention. Occasionally it is not too bad to reconfirm what we have said before. What we said was last year, February, this is a process that is going to take until far into 2014. Mid of the year to be very precise. We are still in line with that plan. You see in the press that there is a handful of bids, what was mentioned. Let me state clearly what I mentioned this morning at the press conference. This is not a sale that you do via an Internet auction, or you put it on the blackboard. We always look for a selective process with a few serious bidders. That is where we are. As far as I can see it right now, we are still confident that we can finalize this process before the middle of this year. We will then see whether bids and offers match or not. Urenco, also in line with what we anticipated. We always said Urenco is a bit more difficult to sell. That is why it is not in our numbers for 2014, but it will come beyond, maybe or hopefully in 2015. As you know, this is three governments involved and various ministries per country. To keep them all under one hat is not that easy, but we are confident about making progress there, and we will see at least some advancements there in the next year. Thank you very much. Okay. The next question, please. The next question comes from Benjamin Leyre, Exane BNP Paribas. Please go ahead. Yes, thank you, and good afternoon. Two questions, please. First one is, can you update us on the timing of the legal procedure to obtain perhaps the suspension of the payment of the nuclear tax? That will be my first question. The second question, the gas storage. You mentioned that you have some gas storage contracts that are out of the money. Is there anything you can do about it? Can you renegotiate these contracts? Can you also indicate when these contracts expire? Thank you. Yeah. Hello, Benjamin. I will start with your question on the timing of our proceedings on the nuclear tax. We have filed for a suspension of that tax, and this is now up to the courts when they will rule on it. It's, of course, like in most countries, a rather imprecise science to predict the speed of court workings. With regards to the gas storage contracts, a significant amount of them is longer lasting. Some of them are in our own portfolio, and the storage system operator. You see the commercial burden and the supply and trading against the storage system operator. Therefore, it will accompany us for quite a while, as long as summer-winter spreads are as depressed as they are currently. Thank you. Okay. Then the next question, please. The next question comes from Patrick Hummel, UBS. Please go ahead. Yes, good afternoon. Thanks for taking my questions. First one, on your 2014 guidance, you keep it unchanged. I just wonder why that is, because you had a few positive effects. On the one hand, you overachieved on the cost cutting, which also means 2014 will be about EUR 150 million better than originally planned. Second, you have this EUR 100 million benefit from the impairments on the D&A line. Third, you have this Gazprom fix. All three of those items should have a positive impact. So I wonder what has been negative since November that makes you keep the guidance unchanged? The second question is referring to slide 6, where you show the EBITDA now for the first time for generation on a mark-to-market basis. I haven't taken a ruler here, but I would think that the midpoint is somewhere slightly above EUR 1 billion on EBITDA. Is it right to assume this is based on November and as of today, that would probably have slightly deteriorated further with carbon going up and coal going down? If so, you haven't called it the earnings trough in 2014. You said it's the new normal, but still, it takes a lot of positives in the other divisions to assume a stable operating profit in the years after, with Innogy maybe at EUR 500 million based on your guidance and the other divisions slightly growing and assuming that most incremental cost cutting from here happens in generation. If you have any additional color on the other divisions and qualitative guidance, that would be very helpful. Thank you. Yeah. Hi, Patrick. The first question on the 2014 guidance, which we left unchanged, we did this on purpose. Of course, you are right to quote a few positive developments since November, like D&A, like the Gazprom settlement, but there are also negatives. We had a warm winter, as you may know, and the year is still pretty young. So we consciously refrain from adding every new bit into a revised guidance, and we stick to what we told you in November. With regards to the generation EBITDA, as you see it on slide 6, I think the order of magnitude you derive with a ruler, which you should normally not apply to those charts, but it is broadly correct. There were, I think, a few more detailed questions squeezed into the two-question rule. One was, what's the effect of the recent market price developments? I think we have just very recently seen the price move upwards, the last 36 again, and we all know that events in Russia and similar stuff will probably continue to add a dose of volatility for the next couple of weeks there. We always said that this is for those commodity prices which we saw in the broad range since summer last year. They were oscillating somewhere between slightly below 36 and close to 38. If, of course, commodity prices greatly deviate from this, we can't exclude ourselves from these forces at work. The last sub-question of your two questions was, I think, about where then do all the other offsetting effects come from? I think this is a debate we've often had before, and you must just believe us that we know what we're saying about the new normal, that by and large, over the next couple of years, there will be also positive offsetting effects, which you can see qualitatively listed on slide number 22. Okay. Let's leave it at that. Thank you. Thank you. Can we take the next question, please? The next question comes from Miss Nathalie Casali, JP Morgan. Please go ahead, madam. Hi, good afternoon. My first question would be on the medium-term view of the company that you've outlined, a view which is much more focused on the downstream business. On that view, do you expect the current EUR 1 of dividend to still be an adequate level of remuneration for your shareholders? My second question is just following up on Patrick Hummel's question on slide 6. Does the outlook that you give for the EBITDA level, I understand this is after payment of the nuclear tax. Could you just clarify? Thank you. Yes. Natalie Casali, thank you for your questions. Let me start with the second one. The outlook is indeed, looking to my left side, after payment of nuclear tax, even if we would not cash-wise have to settle it, we still have to accrue for it, because until the final settlement is being done, there's always the potential risk of having to still pay for that. My first question is on, is EUR 1 dividend sufficient on a business which is more focused on downstream in the midterm? Well, one can debate about that. If you look at the bandwidth that we've given for 2014 guidance, plus our dividend policy, which says 40%-50%, the EUR 1 dividend is still within that corridor. Naturally, it's our aim to eventually grow that dividend again, but we're not giving any guidance or any promises in that respect. It depends a bit on how successful we will be on growing that downstream business. It also partially depends on what is going to happen finally in the generation business, both power price-wise as well as also market design-wise. Those are all unknown factors at this moment in time, and therefore, when we nailed down the EUR 1 last year when we announced it, we clearly said this is an expectation level that we see for the next whatever time to come, and we'll see what further ambitions we can add to that. Very clear. Let me please add, this is not a dividend guidance beyond 2014, and this is not a dividend floor. This is all within the broader aspect of the new normal for our recurrent income, which we just mentioned on Patrick's question and combined with the payout ratio. Thank you very much. Very clear. Okay, thank you. Then the next question, please. The next question comes from Mr. Alex Karnick, Deutsche Bank. Please go ahead. Yes, hi. Good afternoon. Two questions from my side. One is following up on Patrick's questions, but more from a cash flow angle. Provided we've seen material differentiation from the commodity deck on which sort of these trough comments or whatever it is built on would we also see sort of your target at risk to cover your dividend and your CapEx from operating cash flow? This is my first question. The second is on the discount rates for nuclear provisions. Senior, there's a bit of an adjustment there, probably coming closer to what you're discounting the pension provisions with. But could you also give us a magnitude at which you're inflating the costs for nuclear provisions at this point in time? Thank you very much. Hi, Alex. On cash flow, very clear statement. The 2015 target of a balanced cash budget, so cash flow from operating activities, covering CapEx and dividends is not at risk. This is still fully valid and alive. On nuclear provisions, you're right. There was some movement reflecting the overall lower interest rate and inflation environment, but we do not publish the escalation rates for our nuclear provisions. Okay, fair enough. That is consistent with the past, but I gave it a shot. But basically, the message is, since we do not have seen a significant movement in the nuclear provisions, that there was partially a lowering of the escalation rate along the same lines of the discount rate, just conceptually. Yes. Conceptually, you are right to assume that ultimately what counts is the spread between the escalation rate and the discount rate, and as we have not seen significant movement, there might have been a movement in the likewise direction on the escalation rates as well. Fair enough. Thank you. Okay, thank you. The next question, please. The next question comes from Mr. Bobby Chadha, Morgan Stanley. Please go ahead. Hi, good afternoon, everybody. First question is, you gave a lot more detail today on the efficiencies and cost-cutting program. I just wanted to be clear if the additional EUR 500 million that should be materialized by 2016 will be a net benefit to operating result. Is that correct? The second question is on the assessment of capacity closure, where you talk about keeping under review some older coal blocks, some specific 300-megawatt lignite blocks, and then continuing contractual capacity. What is it about the specific lignite blocks in particular that would differentiate them? Is it age, availability, or location? Yeah, Bobby, let me start with the first question. That's a bit my hobby, after discussions the last few days on this topic. We'd like to separate between the efficiency programs, which are the actual measures that people take in place in order to get improvements done, and what the net benefit to the bottom line of the P&L is. Efficiency programs, so the gross line, the top-level line is EUR 1 billion old program, plus another EUR 1 billion new program. We see, however, in the next years to come, a lot of inflationary cost components coming through in our P&L. Think about contracted services, these kind of things. Therefore, the second EUR 1 billion will only benefit to the bottom line with EUR 500 million net. The EUR 500 million you can account for, that was scheduled or planned for 2017 and is now contributing to the bottom line into our planning one year earlier at the end of 2016. Thank you. Yeah. Hi, Bobby, from me as well. On your question with regards to capacity closures, I think you refer to the lignite units, especially in Frimmersdorf and the Westfalen old hard coal-fired unit. There are maybe two comments I would make to your question or two answers. The one is that usually those decisions are taken when these units reach a point where additional new significant cash-out has to be committed. So like, usually at an outage or a major outage. This, of course, is dependent on the outage strategy and the run-hour profile that they have. This is the one reason why some blocks who are under review might not be decommissioned one or two quarters thereafter, because these natural breakpoints have not been reached yet. The other aspect, for example, what makes Westfalen special? Well, that's the only old hard coal-fired unit that we still have. Our fleet then does no longer contain any stations on hard coal of that age. On Frimmersdorf lignite, it's that these are the two only remaining units left at this specific site. This is a different calculus than for mothballing or shutting down than you would have at a site where there's still other units sharing the same overhead cost, for example. Great. Thank you. Okay, thank you. The next question, please. The next question comes from Deborah Wilkens, Goldman Sachs. Please go ahead, madam. Yes, good afternoon. I was hoping to continue on the last point. Just starting off, could you just clarify in terms of the old hard coal contracts, whether or not you've extended any of them, and whether or not all of them expire by the end of 2015? My second question is if you could just provide an update as to when RWE needs to make a firm commitment to the extension of the lignite mine. Yeah, let me start with the second one, Deborah. We have made publicly a firm commitment some months ago in relation to the moving of some of the villages that need to be cleared for the expansion of the next lignite phase. That's the firm commitments that we've made. We have received from the highest institutional court the confirmation that our lignite mining plan, at least for the third phase, is valid and is right. On that basis, we are continuing to operate. There's no further firm commitments to that extent in the next few years to come. Hi, Deborah. With regards to your question on the old hard coal ignite contracts, we have not prolonged a single one. All of them will be out of operation until end of 2015. I think that's what you asked. This does not mean that there are then no contracts left, but these were not up for prolongation in the period between Q2 2013 and now. Thank you. Okay. Yep. The next question, please. The next question comes from Sofia Savvantidou, Citi. Please go ahead. Yes. Hello, everyone. Thank you for taking my questions. Just one in two parts, if I may. You have a target of reducing your carbon emissions divided by output from about 0.76 times that you had in 2015 to 0.62 by 2020. If you could give us a little bit of color in terms of how you expect to achieve that, how much of the improvement is coming from maybe closure of older plants, how much from renewables, how much is already sort of in the pipeline. The second question is if you have an estimate of where your current carbon factor is versus, let's say, the average carbon factor in the market, so versus the average price setting plants. Thank you. Hi, Sofia, this is Stephan. I would like to refer you to the annual report where we say where the current emissions factor is. I think if my memory serves me correct, 0.76 tons per megawatt hour. We also made a statement in our outlook that, yes, we have a 2020 target out there, but due to the fact that the gas fire stations are so underwater, so to say, it will be harder for us to achieve that target over the time if the market conditions, be it the market design or commodities, don't change. But to add to that. With that in mind, is there another number you can give for 2020 or you're just working towards that target and whatever the outcome is? Yeah. We stick to that number. We're working towards a target. It is clearly a combination of expansion of renewables, as well as increasing the average efficiency of our power stations. That latter one is a combination of new power plants coming on stream, like Hamm and Eemshaven, but also what we expect a further utilization of our gas power plants. They are mostly standing idle at this moment in time. We do not foresee that to continue until the end of this decade. Therefore, a combination of those with more renewables will lead to a significant further reduction of our CO2 emissions. Our aim, and it's still quite a way out, but our aim is by 2020 to indeed land at the 0.62 metric tons per megawatt hour. Sophia, was that sufficient? Yes. For that question, yes. If you could, my second question as well, in terms of where you think you are versus the average setting plant, because we have seen, obviously, in recent times, CO2 prices going up, but power price is actually going down. If you could tell us where you think you are versus the market. Thank you. Yeah. Without having a concrete figure in front of me, to be honest, what we can say as a general statement, we are still in line with our respective market as the marginal provider. But of course, there are, from a CO2 emissions effect, better placed utilities out there compared to us. But within our respective markets where we are active, we are in the same kind of emissions factor where the marginal generator is. If I might add to that, Sophia. The 0.62 was our original goal, would bring us towards where the average of the market to our expectation would be. Now, what we don't know at this moment in time, how much of the announced plant closures will be ratified by the Bundesnetzagentur, and we don't know how much actually will be closed and what a new market design will do to that. So at this moment in time, still a bit touching into the dark as far as what the rest of the industry will be doing. But our expectation when we set up that plan was that this brings us to the average of the industry, and we're basically then CO2 neutral as far as price impacts on our portfolio are concerned. Okay. Thank you. Okay, thanks. Then the next question, please. The next question comes from Mr. Ahmed Farman, Redburn. Please go ahead. Hello. Good afternoon, everyone. Thank you for taking my question. Just one question on my side on your supply business, which you show on slide 4 is likely to account for 50% of your unregulated operating income. For U.K. and Netherlands, your guidance suggests a decline in earnings in 2014 versus 2013 due to competitive pressures. I'm just wondering if you would give us a bit more qualitative guidance beyond 2014. How do you expect the earnings in your supply business to develop, and perhaps touch upon the German supply business there as well? Thank you. Yeah. Hello, Ahmed. Here is Bernhard. I think by the general trend, and this is no guidance to be very precise, is that on the supply business, this is The one part, the other part, at least for Germany and Eastern Europe, is also the distribution business. We only show combined numbers so far, including our 2013 reporting. There are two different forces at work, I would say. The one is in the distribution business in Germany, for example, we have now lots of clarity because the regulatory periods there have just started, and it will be 2018 for electricity and 2017 for gas, until the new periods start. Until then, we have a very high visibility of our future revenues, and this is part of our overall statements. In the U.K., as you know, and maybe some other markets, of course, retail prices are under scrutiny either by regulators or by the general public. So it's very difficult to give any indication on where they will be heading post 2014. Okay. Thank you. Okay, thank you. The next question, please. The next question comes from Mr. Ingo Becker, Kepler Cheuvreux. Please go ahead. Yeah. Thank you. Good afternoon. Peter, you mentioned a new market design a few times, and I was wondering, how confident are you that it would, once it is finally implemented, truly add to your earnings? What is the kind of horizon we are talking about here? When do you see such a new market design coming in? Finally, I guess with a reference to your slide 7, what do you think a new design could focus on? The WACC of your fleet or plant or the EBIT or the free cash flow? Well, not sure how to best approach this. Let me first say that in our midterm planning, we are not planning with any additions out of a market design bonus or fee, or whatever you would like to call that. So we are preparing ourselves for the situation if it does not come. I think that is a very good rock solid planning assumption. Everything which comes on top of that is a nice to have. That does not mean that we are laying back and saying, "Let us wait until it comes." We are still very actively working with the regulators, with the politicians. Actively working with them to explain what design a future market, a market with a growing, an ever-growing part of renewables would need. In that work and the studies that we have been doing for that, it is clear that a non-discriminatory, technology neutral, pan-German or maybe even with some surrounding countries, but the bigger the market, the lower cost it would be for society as a whole. Now, how much that cost will be also depends on how quick that implementation will be done and how many power plants will have been closed by then. So the more plants you close in the next months or year to come, the less there is left for a market design with a capacity market and the higher the capacity premium would be. Our advice to the politicians is the quicker you do it, the less it will cost, but it will still take something like at least the course of this year to get a design done, and then maybe a part of next year to get it transferred into legislation. Earliest you are talking about a law in place mid or maybe second half of next year. Until the first effect out of that will be coming, we are talking earliest 2016, but more realistically 2017 or 2018 with some lead time would be my guesstimate. All of that could even be kicked back until the end of the decade if politicians don't get their act together and don't give this the right priority. What we've seen in the last weeks and months is that the new minister of economy and Innogy, and its state secretary, are finding out that a focused, decentral market obviously is not the best choice to be. It doesn't mean that they are already convinced of our model, but at least they're not making the wrong actions at this moment in place, and that's already a good step forward. I will stay on that, and I would say it's something to be monitored in the next months to come. Focus you need to know of the minister in his first months of his reign was on the renewable subsidy scheme, the EEG. Second target that he is pushing is then ETS. Third on its line of priorities is then the market design for the future, which will somewhere be in its rough contours ready by the middle of this year, early after summer, to my view. Right. Thank you. Can I just add to that? Can you say a few words on your perception of the government stance on the ETS? Secondly, on your slide 7 again, this 20%-30% of your fleet that is free cash flow negative or at zero, as I take from that slide. Is there any nearer term hope for a solution for this part of the fleet, like being called on the reserve status or any other solution? Let me start with the simple part, and then Bernhard can do the more difficult half of the question. The German government subscribes to the 40% CO2 reduction by 2030. They are fully committed to that goal. They, on top of that or in addition to that, want to have a renewables target as well, but they have understood that renewables target should not be impacting or should not be conflicting with the CO2 reduction target. So CO2 reduction needs to be leading and the other one needs to be supportive. It still is a long way to get that done, but a government has more means to play than we as a straightforward company have. They can maybe bargain out some other elements. First, the countries that are not very receptive of that CO2 target right now, think of Poland, Hungary, Romania, and they have more fish to fry, which they can use in order to, at the end of the day, get to a compromise where the 40% reduction target is being achieved. On a European level. Now, that will naturally have a supportive effect on the CO2 price. But just to take away too much of your dreams, we need a CO2 price of EUR 60 or EUR 70 in order to switch from coal to gas. I do not see that happening in the short term. Therefore, we will still have a struggle with some parts of our fleet, and therefore, a capacity market will continue to be a very important measurement, in addition to the CO2 reduction and a higher CO2 price. Yeah. With regards to the second part of your question on what is being done or what hope is there for those plants who are earmarked as being cash negative, on page number seven. First of all, some of them have been mothballed in the meantime, so this is the status, as you know, of the world as it was in Q2 last year. Therefore, we have already done measures on our side. How much hope is there for short-term relief by some sort of state aid, or the grid agency supporting it? Well, this depends on the system relevance of these units. Most of our units under these criteria are not deemed system relevant at the time being. But bear in mind that sooner or later, especially in the second half of the decade, when the nuclear decommissioning continues, we will need some additional capacity again. Then we will need a mechanism in Germany which rewards or reimburses not just the cash cost or a positive EBIT, but the full cost of capital to conventional power plants. Otherwise, they won't be built. Right. Thanks very much. Thanks. Next question, please. The next question comes from John Musk, RBC Capital. Please go ahead. Yeah. Hi, there, everyone. Only a couple of simple questions left. On slide 8, on Innogy, I just wanted to confirm that the guidance that you are giving based on using a rule was around about EUR 500 million of EBIT there. More importantly, what is the level of CapEx that is left to be spent to deliver the new plants that you highlight on the slide, and how does that compare to overall group CapEx that we should be thinking about for the next couple of years? Yeah. Hello, John. I think the order of magnitude in terms of where we want to end up at the end of the period shown on slide number 8, that is pretty correct. We have given the EUR 500 million indication already quite a while ago as a general target to cover our cost of capital. For the renewables overall, there is a EUR 1 billion sum left for renewable projects to be spent in the next three years, including 2014. Of course, with a kind of tapering off towards the end of the period, where the level will be significantly lower. By and large, you can say whatever left as discretionary spending in our CapEx budget will go into renewable projects. That is fine for you, John? Yeah. So you are saying that when we get out to 2016 and there is no more renewable spend, are we back at the, I think you said EUR 2.5 billion of maintenance CapEx for the group? No. If you look to our company presentation, what we indicated is that the maintenance CapEx or the total CapEx excluding D&A is EUR 2 billion. What Bernhard just said is over the period 2014 until 2016, the total sum for renewables is roughly EUR 1 billion. Okay. Yep, that's clear. Okay, the next question, please. The next question comes from Frank Batartu, Credit Suisse. Please go ahead. Yes. Good afternoon, gentlemen. Thank you for taking my question. I have two questions on the credit side, if I may. The first one is on the rating positioning. Based on the outlook, it looks like with or without DEA, you may fall short of S&P expectations at BBB+ in 2014. I would like to know when you expect to meet with them, and do you expect the rating agency to give more time to improve your credit metrics? That was question number one. Question number two is on your hybrid debt. Could you please confirm that you still intend to call back your hybrid bonds at the first call date? I believe a EUR bond that will hit the first call date in September 2015. Thank you. Yes. Hello. So with regards to the first question, rating agencies and our current key performance indicators on those numbers, they are still above the midterm target, which we set ourselves of 3.0. That is very transparent. We are in constant contact with the rating agencies, and ultimately, it is their decision. This is all we can say for the time being. You know that we are now with Moody's and Standard & Poor's on the same level since the second half of last year. With regards to hybrid debt, there is no change whatsoever in our intentions about calling them. Thank you very much. Okay, then the next question, please. The next question comes from Tanja Markloff, Commerzbank. Please go ahead. Yeah, good afternoon. I have one question left. It's on the On your request for the option to increase capital at the AGM, as far as I remember, you reiterated at the press conference that you might ask for this option at the AGM. I would be interested what would trigger a decision to execute such an option from your side. Do you have a specific development in mind, or would you say that if you meet your 2014 earnings targets and the medium-term cash flow and CapEx targets that it will not be necessary? We can here happily reiterate our previous statement that we have no intention whatsoever to execute a capital increase. The fact that we have it on the AGM's agenda is just that it's a standard toolkit, which you will find at almost any other DAX company as well, without them ever executing them. Okay, thank you. Okay, then next question, please. The next question comes from Deborah Wilkens, Goldman Sachs. Please go ahead, madam. Yes. I was just hoping to follow up with one point that you mentioned earlier. You said you were unlikely to make a decision on some of these older units until they get close to a maintenance or an outage period. How does that make sense if you have to give a year's notice, especially if you don't really see the likelihood of some payment coming from the government anytime over the next few years? Why wouldn't you preempt that decision and at least give that notice? Well, that's very simple, Deborah. This is Peter Terium here. As long as a unit is cash positive, you have a very poor case towards the Cartel Office to preemptively or obediently then close it. It's just not done. It would immediately be in quite a complicated theoretical position. As long as it is contributing to the bottom line, we run it until the moment where we see, and most of our maintenance programs do have at least a year lead time, where we see that there's a maintenance program coming up, and that is then with a year's lead time, the right moment to announce the closure of it at the ленного to stay out of the hands of the national cartel police. So just to clarify, are you indicating that nothing you are running currently is cash loss-making? Some of it is borderline. Another question you need to ask yourselves, if it is just hypothetically, say if it is losing cash of EUR 1 million or maybe EUR 1.5 million a year, then you have to evaluate whether that is an option which you are willing to pay to keep it open just in case of when the system shrinks. If it would be EUR 1 million, EUR 1.5 million a year, I would certainly say that is a good price to pay for that option. If it would be EUR 15 million or EUR 25 million a year, that would be too dear of an option. Unfortunately, truth is most of it is in the lower numbers than in the higher numbers, and that is why it is difficult to already forgo that option to close it immediately. And maybe just an addition, Deborah, the fact that a power plant is maybe slightly cash negative, and as Peter said, most of them are just slightly in the reds. We are not losing hundreds of millions of euros on a cash basis there. Even if it is slightly negative, it does not mean that immediate shutting down is the most value-accretive option because in all the countries where we are operating, you are incurring shutdown costs as well, which also come in the form of cash outs, and you have to do it just like an investment calculation, the positive cash flows against the negative ones. Therefore, as Peter said, it might pay off to keep at least a cash borderline unit going for a certain while before you make a final decision. Thank you. Okay. Thank you. Then, the next question, please. The next question comes from Mr. Benjamin Leyre, Exane BNP Paribas. Please go ahead. Yes. Thank you. Two follow-up questions, please. One on DEA. Can you explain what is behind the quite large increase in the proven resources at the DEA, and could there be a further increase in these resources in 2014? Second question on the debt factor. There is now a clear incentive for the top managers to bring the debt factor down to 3 times by 2016. I assume this target has been set in a very rational manner. So what realistic events need to occur for this target to be reached? Thank you. Well, hello, Benjamin, again. The first part of your question is that the major Egyptian field, West Nile Delta, was moved from reserves to resources. The second one, with regards to the leverage factor now becoming part of our incentive program for managers. Yes, the 3.0 times net debt over EBITDA target is considered to be very ambitious. Without giving you any details on our mid-term plan, I think most of you analysts yourself have your own predictions on where our leverage factor would be in 2016, and I think most of you would also regard a 3.0 leverage factor in 2016 as quite a good achievement. So it won't be a walk in the park to lead this program to a positive cash-out. Thank you. Okay. There are still questions left, so next one, please. The next question comes from Bobby Chadha, Morgan Stanley. Please go ahead. Thanks very much. Just a quick follow-up on the minority interests. The minority interest, I think, fell quite sharply to around EUR 200 million. Are there any one-offs in there? How can we think about that going forward? That's my follow-up. Thank you. There are no major one-offs in it. Going forward, we will see. But generally, of course, due to the fact that we are also selling off some of our assets where we have 100% full consolidation, you will see the trend is towards higher share of minorities. Okay. Thank you. Okay. Are there any questions left, operator? There are currently no further questions. Okay. If that's the case, then I would like to thank you all to join us on this call. Me and my team, we are happy to answer the remaining questions, whatever is left. Thanks. Ladies and gentlemen, thank you for your attendance. This call has been concluded. You may now disconnect.