E.on Se · XETR:EOAN
E.on — JP Morgan US Roadshow July 14-16, 2004
51 slides from E.on's conference presentation, July 2004
Slide 1: Driving Home Performance
“Driving Home Performance” Presentation by Dr. Wulf Bernotat, CEO, E.ON AG JP Morgan US-Roadshow July 14-16, 2004
Slide 2: Agenda
Agenda I. Introduction P. 4-5 II. E.ON’s Focus on Power and Gas P. 6 III. E.ON Group Challenges P. 7-10 Ÿ Create value from power-gas convergence IV. Expanding in New European Markets P. 11-14 V. Strengthen position in Eastern Europe P. 15-17 VI. Investment and Financial Criteria P. 18-19 VII. Regul
Slide 3: Back-up Agenda
Back-up Agenda Electricity Prices P. 30-32 Coal Prices P. 33 Gas Pricing Factors P. 34 Gas “Entry/Exit” Model P. 35 Long-Term Gas Contracts P. 36-38 E.ON Ruhrgas Sales by Sectors P. 39 Gas Price Formation P. 40 E.ON Ruhrgas Volume Development 2003 P. 41 CO2 Emissions Trading P. 42-45 UK Distribution
Slide 4: E.ON – Transformation into a focused company
E.ON – Transformation into a focused company VEBA/VIAG E.ON • Both diversified conglomerates, concentrated • Transformation into a focused "power and gas mainly in electricity, chemicals and company" telecommunications businesses • Focus and growth strategy: Almost € 90 billion of total transaction
Slide 5: 2003 – E.ON sets course to become the undisputed industry leader
2003 – E.ON sets course to become the undisputed industry leader • May 1 - New CEO takes office • May 15 – Announcement of CEO’s “100-day agenda” and the implementation of project “on.top” to review the E.ON strategy, company structure and performance targets • August 14 – E.ON reports the details o
Slide 6: E.ON has strong positions in its five core markets
E.ON has strong positions in its five core markets Market positions – power and gas US-Midwest UK Kentucky: No. 1 in power generation No. 2 in power generation with with 47 % of total 95 TWh MAIN No. 1 in power/gas retail with 11% of total 350 TWh No. 2 in power/gas retail with 18 % Nordic 42 % of t
Slide 7: Germany – Power and gas convergence potential opportunities for further synergies
Germany – Power and gas convergence potential opportunities for further synergies • Downstream synergies • E.ON Hanse • Avacon • Midstream optimization • Optimizing supply for regional distributors from the E.ON Ruhrgas portfolio • Small scale optimization in infrastructure • Optimizing the interfac
Slide 8: Midstream convergence offers opportunities for power-gas arbitrage
Midstream convergence offers opportunities for power-gas arbitrage Expected growth in Gas-fired generation … … leads to value chain convergence TWh 417 2020 • Developments differ from one country to 2010 319 2000 another 274 271 • Uncertainties due to power demand, price of 224 electricity and inves
Slide 9: Downstream convergence offers cost extracting synergies
Downstream convergence offers cost extracting synergies Number of dual fuel customers, e.g. UK European downstream integration benefits +4% 10.5 • Exploit operational synergies in No. of 10.12 customers +23.2% distribution and retail in m1,3 +22.4% 8.2 • Manage cross-commodity sales 6.7 activities +
Slide 10: Opportunity to extend vertically integrated gas business in UK and Nordic markets
Opportunity to extend vertically integrated gas business in UK and Nordic markets Njord (Norwegian Sea) St. Fergus Scoter Elgin Glenelg Franklin West-Franklin Equity-Gas - NBP Bacton Northern Route Legend Emden London Existing pipeline, Bunde NWE Hub 80 bar ZeebruggeHub - Aachen Southern Route è Equ
Slide 11: New European markets offer potential in power and gas
New European markets offer potential in power and gas Expanding in new European markets Rationale • E.ON has a strong position in core North European markets – focus is on enhancing integrated position Eastern Europe • E.ON - approximately 5% market share in • Russia - strategy and options Italian r
Slide 12: Russian power and gas markets
Russian power and gas markets Key facts – Power (2002) Generation 890 TWh Net consumption 870 TWh Retail customers 50 m Key facts – Gas (2002) Annual production 600 bcm Annual consumption 400 bcm Gas customers 22 m Market Notes • Energy market to experience major changes in coming years. • Power: Re
Slide 13: Romania - Privatization of regional gas distribution
Romania - Privatization of regional gas distribution Romanian gas transportation system Key facts (2002) Annual gas production 13.6 bcm Annual gas consumption 17.1 bcm UKRAINE Distrigaz North Botosani Gas customers ~ 1.9 m Suceava Satu Mare SUCEAVA Lasi Baja Mare HUNGARY BAIA MARE BISTRITA VASLUI RE
Slide 14: Bulgaria – Privatization of regional electricity suppliers
Bulgaria – Privatization of regional electricity suppliers Bulgarian EDC – 3 Packages Power Market (2002) Consumption 25 TWh Export 6 TWh Retail Accounts ~4.5 m Varna Pleven Gorna Oryahovitza Market Development Stolichno • A 67 % shareholding in each of the Stara Zagora packages is being offered. So
Slide 15: Eastern Europe provides additional opportunities for growth
Eastern Europe provides additional opportunities for growth Geographic scope Key issues Size ~300 TWh electricity demand ~650 TWh gas demand Privatization/Liberalization • Privatization is ongoing • Markets open up step by step – EU requirements determine the agenda • Regulatory frameworks are stabi
Slide 16: E.ON's well established presence in Eastern European power markets
E.ON’s well established presence in Eastern European power markets Germany E.ON in Hungary • Supplies electricity to over 2.5 million customers SCE • Has a 45% share of the local electricity Czech Republic Poland distribution market • Our majority stakes in three regional distribution SME companies
Slide 17: E.ON's activities in Eastern European gas markets
E.ON’s activities in Eastern European gas markets Germany Key figures E.ON Shareholdings² Czech Republic Poland ZCP STP PP • Czech Republic VCP Gas supplied 58.4 TWh JCP¹ SMP Customers 1.5 Mio. JMP SPP Slovakia Ukraine • Slovakia3 Gas supplied 74.9 TWh Austria Customers 1.4 Mio. Hungary FOGÁZ • Hung
Slide 18: Mid-term investment plan reflects our aim to strengthen the integrated business model
Mid-term investment plan reflects our aim to strengthen the integrated business model in core markets Investment plan 2004-06 in bn € Strategic directions of investments • Strengthen current position to better Gas – manage supply on European level strengthen 8.7 5.1 • Increase downstream involvement
Slide 19: Future external growth subject to rigorous acquisition criteria
Future external growth subject to rigorous acquisition criteria Strategic Criteria Financial Criteria • Market attractiveness • Earnings enhancing in the first full (returns, growth, regulation, country risk) year after acquisition. • Target attractiveness • Returns exceeding cost of capital three y
Slide 20: German electricity and gas regulation on track
German electricity and gas regulation on track Current status: Draft law published by Ministry of Economics and Labor (BMWA): • Equal importance will be placed on competition and security of supply • Pricing method to enable investments required to ensure viability of networks • Electricity: Associa
Slide 21: Effects of the NAP on E.ON Energie
Effects of the NAP on E.ON Energie • Overall, E.ON accepts the compromise, but reserves final judgment of the effects of the proposal until a thorough analysis is completed. • Actual allocation – and impact on E.ON – depends on the results of the application process beginning in summer, but may resu
Slide 22: Commitment to ambitious financial targets and at least a strong single A rating
Commitment to ambitious financial targets and at least a strong single “A” rating ROCE 1 in % Free cash flow in bn € Dividend per share in € 9.5% Cumulated defined ‘03e-'06e 21.0 11.5 > 10 % CAGR capital cost > 10.5 benchmark (2002) 9.3 1.75 9.5 2002 2006e Cash provided Fixed Free cash 2002 2006e by
Slide 23: Well on track to achieve our Adjusted EBIT targets by 2006e
Well on track to achieve our Adjusted EBIT targets by 2006e Objective 2006e Levers for Adjusted EBIT improvement in bn € Adjusted1 • Contribution from acquired companies (E.ON UK, E.ON Ruhrgas) EBIT • Organic growth 6.7 3 6.2 + 20 % • Operational improvement of 1bn € 4 through 0.62 - Operational exc
Slide 24: Strong commitment to increasingly rewarding shareholders annually
Strong commitment to increasingly rewarding shareholders annually in € Dividend per share 2.00 1.60 1.75 1.35 1.25 0.97 1.07 1.07 0.77 0.87 0.66 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 VEBA: 1993 – 1999 E.ON: 2000 – 2003 24
Slide 25: E.ON Group – Strong improvement in financial performance
E.ON Group – Strong improvement in financial performance First Quarter in million € 2004 2003 +/- % Sales 14,622 13,713 +7 Adjusted EBITDA1 3,024 2,658 +14 Adjusted EBIT2 2,345 1,931 +21 Net income 1,455 986 +48 Cash provided by operating activities 1,090 1,051 +4 Free Cashflow3 627 595 +5 1 Non-GAA
Slide 26: E.ON Group – Continuing growth in core business Energy
E.ON Group – Continuing growth in core business Energy First Quarter Adjusted EBIT in million € 2004 20031 +/- % Central Europe 1,179 1,082 +9 Pan-European Gas 416 3322 +25 UK 270 196 +38 Nordic 279 153 +82 US Midwest 93 63 +48 Corporate Center -8 -97 +92 Core Business Energy 2,229 1,729 +29 Other A
Slide 27: E.ON Group - Outlook 2004
E.ON Group - Outlook 2004 Adjusted Group EBIT: Expected to surpass record result of 2003 with a double-digit growth in core business energy Adjusted EBIT by Market Units: Central Europe Expected to rise above last year’s level Pan-European Gas Expected to remain below last year’s extraordinarily hig
Slide 28: Summary
Summary • E.ON - the world’s largest investor owned energy utility company • Strong balance sheet and one of the best ratings in the utility industry • Focused approach to strategic development and delivering performance • Clear commitment to ambitious performance targets 2003-2006 • Delivery agains
Slide 29: Back-up Charts
Back-up Charts
Slide 30: Trend in Wholesale Prices (1)
Trend in Wholesale Prices (1) Forward market year ahead, Baseload (Status: 31 May 2004) 45 40 • Price increase of raw materials 35 such as coal, oil and gas 30 • Capacity shortage due to power station shut-downs 25 • Increased power €/MWh 20 demand/outages across Europe • Uncertainty in the market 1
Slide 31: Trend in Wholesale Prices (2)
Trend in Wholesale Prices (2) Spot-market, Baseload (Status: 31 May 2004) 140 120 • Price increase of raw materials 100 such as coal, oil and gas • Capacity shortage due to 80 power station shut-downs €/MWh • Increased power 60 demand/outages across Europe • Uncertainty in the market 40 regarding th
Slide 32: Hydrology and Forwards NordPool
Hydrology and Forwards NordPool 25 300 20 290 15 280 10 270 5 260 0 250 -5 240 NOK/MWh -10 230 TWh -15 220 -20 210 -25 200 -30 190 -35 180 -40 170 -45 160 -50 150 10 20 30 40 50 10 20 30 40 50 10 20 30 40 50 2002 2003 2004 Week Hydrology (TWh) FWYR-04 (NOK/MWh) FWYR-05 (NOK/MWh) • Hydrological condi
Slide 33: International Steamcoal - Price Developments and Forwards for 2005-2006
International Steamcoal - Price Developments and Forwards for 2005-2006 All Prices basis $/mt, 6.000kcal1 (NAR2, CIF, ARA) As of May 7, 2004 $/t $/mt 75 75 Hedge 70 70 2004 2005 65 65 E.ON Energie 100% 37% 60 60 55 55 E.ON UK 105% 48% 50 50 45 38,24 45 long term • Rising fuel-price is passed on 40 4
Slide 34: Gas - Non-competitive factors for E.ON Ruhrgas
Gas - Non-competitive factors for E.ON Ruhrgas • Temperature • Oil price • General economic development • Energy taxation Mean annual temperature Peak temperature Oil price (Brent) [ °C ] [ °C ] [ US-$/bbl ] 12 2 40 0 35 11 -2 30 10 -4 25 9 -6 20 -8 8 15 -10 7 -12 10 6 -14 5 1963 2003 1963 2003 1978
Slide 35: Network Access System for Gas
Network Access System for Gas Point-to-Point Model Entry-Exit Model Entry Exit •„Route“ inquiry • Individual entry/exit systems for each network operator with individual tariffs • Capacity check of contract path • Distance-related fee • Separate booking of entry/exit capacities • Entry/exit capaciti
Slide 36: Main Elements of Import Contracts
Main Elements of Import Contracts Duration Duration •• between between 15 15 and and 25 25 years years •• mainly mainly “base “base load” load” (with (with low low flexibility) flexibility) Flexibility Flexibility •• in in some some cases cases “structured “structured volumes” volumes” Delivery Deli
Slide 37: Features of Long-term Contracts
Features of Long-term Contracts • Balanced risk sharing model Producers Importers • Long-term supply commitment of producers Price Risk Volume Risk • Take-or-pay commitment of importers Long-term Take-or-pay • Pricing based on fair market value supply commitment (interfuel competition) commitment •
Slide 38: Long-term Contracts Remain Backbone of European Gas Supplies
Long-term Contracts Remain Backbone of European Gas Supplies • Considerable investment required 560 billion m3 500 to develop new gas fields and 400 to launch new infrastructure projects 370 437 Imports bringing more distant supplies to 240 West European markets 160 130 123 Domestic • Examples: 2002
Slide 39: E.ON Ruhrgas Sales by Sectors
E.ON Ruhrgas Sales by Sectors E.ON Ruhrgas Sales Region 52 % 18 in Germany Regional Customers Distributors Kiel Kiel 26 % approx 80 Local Emden Emden Hamburg Hamburg Utilities Bremen Bremen approx approx Customers Berlin Berlin 1,100 1,800 Osnabrück Osnabrück Hannover Hannover Frankfurt /Oder /Oder
Slide 40: Gas Price Formation
Gas Price Formation Oil indexation • Main competitors of natural gas are gas oil and fuel oil. • Long-term contracts need an automatic indexation. • Oil indexation secures competitive gas prices. • Example for oil indexation : - Price adjustment every 3 months; 1.1./1.4./1.7./1.10. - Reference perio
Slide 41: Gas Sendout: Gains and Losses 2002 Versus 2003
Gas Sendout: Gains and Losses 2002 Versus 2003 billion kWh Gas sendout 639 2003 Increase mainly due + 25.2 to temperatures Gas sendout 2002 612 Gains from - 6.8 + 9.1 competition Losses from competition 2002 2003 41
Slide 42: E.ON well positioned to respond to the challenges of CO2 Emissions Trading
E.ON well positioned to respond to the challenges of CO2 Emissions Trading Germany - E.ON Energie‘s power generation portfolio characterized by low emissions. Emissions were on average 330 g CO2/kWh in 2002 compared to a German average of 590 g CO2/kWh. - E.ON is confident that possible costs for CO
Slide 43: German NAP-proposal (Act of May 28, 2004)
German NAP-proposal (Act of May 28, 2004) Free grand fathering based on historic 2000 - 2002 emissions Power + Industry sector 2000-02: 505 Mt CO2/a Total allocation proposed for 2005-07: 503 Mt CO2/a (- 0.4 %) Total allocation proposed for 2008-12: 495 Mt CO2/a (- 2.0 %) New entrants Reserve of 9 M
Slide 44: Germany - Timetable 2004 and beyond
Germany - Timetable 2004 and beyond •On May 28th the German Parliament (Bundestag) agreed on the basic principles of the German National Allocation Plan. •Germany’s federal government approved the free allocation of allowances. - Approval of NAP act in the lower chamber (Bundestag) May 28 - Discussi
Slide 45: CO2 Emissions Trading - United Kingdom
CO2 Emissions Trading - United Kingdom • In May 2004 UK government presented a revised draft of its NAP. The draft covers only provisions for the test phase 2005 – 2007. • UK seeks to deliver a national reduction target of 20 % CO2/a by 2010. Since its Kyoto target and its target of the EU burden sh
Slide 46: E.ON UK – Initial proposals of OFGEM's Distribution Price Control Review
E.ON UK – Initial proposals of OFGEM’s Distribution Price Control Review (June 28, 2004) E.ON UK believes that DR4 should boost investment levels in networks to improve performance and cover additional future demands, including connection of renewable energy sources and higher reliability of supply.
Slide 47: E.ON Group – Improvement of Net Financial Position
E.ON Group – Improvement of Net Financial Position1 in billion € 0 -7.9 -7.7 +1.1 -1.7 +1.5 +0.3 -0.9 -0.1 Net financial Divestments/ Cash provided Investments Consolidation Dividends Other effects Net financial position as of deconsolidations by operating of acquisitions position as of Dec. 31, 200
Slide 48: Market Units – Preliminary Key Financial Figures 2003
Market Units – Preliminary Key Financial Figures 2003 Pro forma figures (unaudited) in million € Sales Adjusted Adjusted Capital ROCE Pre-tax Cash- EBITDA1 EBIT1 Employed (%) CoC (%) 2 flow3 Central Europe 19,254 4,471 2,979 17,037 17.5 9.0 4,077 Pan-European Gas 4 12,973 1,889 1,463 13,847 10.6 8.2
Slide 49: Update on E.ON-Rating
Update on E.ON-Rating Standard & Poor‘s (AA-, „stable outlook“) • AA- Rating confirmed on June 4, 2004, outlook improved from „negative“ to „stable“ • The rating reflects E.ON‘s strong vertically and horizontally integrated positions in the electricity and gas markets in Germany as well as Central E
Slide 50: E.ON Group - Financial Policy
E.ON Group - Financial Policy • Centralization of Group funding in order to maximize financing efficiency and minimize structural subordination issues. • Over time, all subsidiary debt will be refinanced at the level of E.ON AG (except in cases of regulatory constraints and economic disadvantage, e.
Slide 51: Forward-looking statements disclaimer
This presentation may contain forward-looking statements based on current assumptions and forecasts made by E.ON Group management. Various known and unknown risks, uncertainties and other factors could lead to material differences between the actual future results, financial situation, development o