Trading / Gas Midstream
Investor Lunch
Dr. Markus Krebber
CEO, RWE Supply & Trading
14 April 2015
PAGE 1 RWE Supply & Trading | 14 April 2015
Overview of RWE Supply & Trading
RWE Supply & Trading | 14 April 2015 PAGE 2
Trading / Gas Midstream comprises five business
lines – not all results are shown in the segment
> Global energy and commodity trading
> Origination deals related to energy & commodities
> Organic expansion into new markets and commodities, e.g.
US Power & Gas, Metals
Trading &
Origination
> Supply of European industrial customers with power & gas, as
well as providing commodity risk management solutions Commodity
Solutions
> Equity/equity-like investments in companies and assets
related to energy & commodities
Principal
Investments
> Commercial asset optimisation of RWE Group‘s power and
gas positions (Generation, Innogy, Retail)
> Result fully transferred to sister companies
Commercial
Asset
Optimisation
Legacy
portfolio gas
midstream
> Long-term gas supply contracts
> Storage and transport capacity contracts
> Management of Gate position
RWE Supply & Trading | 14 April 2015 PAGE 3
900
600
-600
-300
300
Stable operating result (excl. legacy effects) while
funding requirement significantly reduced
Tangible Asset Base
(Working Capital,
Investments)
€ millions
2,600 1,100 100
2012 2013 2014
IAS Operating result
Thereof Legacy portfolio
gas midstream
IAS Operating result (excl.
legacy effects)
0
RWE Supply & Trading | 14 April 2015 PAGE 4
Focus Topic: Principal Investments targets capital-light
high return investments across commodity markets
Description Status Selected Projects
> Financial investment in the Conergy Group,
a global photovoltaic EPC/O&M provider
and developer
> Completion of minority share acquisition
in March 2015
> Purchase of a UK coal-fired power station
and conversion to biomass using RWE
engineering knowledge
Lynemouth Power > Technical conversion project is in
progress
> Awaiting EU State Aid approval for
Investment Contract
> Acquisition, construction, and financing of a
UK ground-mounted photovoltaic project (37
MWp) and post-construction sale on pre-
agreed terms
> Kencot Hill was acquired in April 2014 and
constructed successfully
> Exit to end-investor Foresight was
completed in March 2015
> Focus: Private equity-type investments with attractive returns and fast capital recycling in combination with
leveraging RWE’s energy commodity expertise and market access
> Main investment themes: Renewable investments, arbitrage opportunities (e.g. shale gas/LNG) and commodity price
recovery plays
Kencot Hill
Blackhawk
Conergy
> 25 % participation in US Central
Appalachian coal mining company, including
exclusive coal marketing rights and coal
offtake options
> Although coal price remains at low levels,
investment is attractive due to embedded
commodity trades
RWE Supply & Trading | 14 April 2015 PAGE 5
Back-up: RWE’s forward hedging of conventional
electricity production (German, Dutch and UK portfolio)
Outright (GER nuclear and lignite based power generation) Spread (GER, UK and NL/B hard coal and gas based power generation)
2016 forw
ard
>30% >20%
-24 -21 -18 -15 -12 -9 -6 -3
Months before delivery of forward contract
-0
As of 31 December 2014
>40% >10%
2015 forw
ard
>30% >10% >40% >10% >40% >20% >50% >30% >60% >40% >60% >50% >80% >60%
>40% >10%
>90% >70%
>60% >10%
2017
forw
ard
>30% <10%
>90% >70%
>60% >20%
PAGE 6 RWE Supply & Trading | 14 April 2015
Energy Wholesale Market Update
RWE Supply & Trading | 14 April 2015 PAGE 7
Various fundamental factors influence power prices
on the long-term forward market
Reservoir
level Power plant
new build
Marginal costs of
thermal plants
Power plant
closures
Available
capacity
Wind capacity
growth Subsidies &
technical
progress
Seasonal
temperature
forecast
Residential
demand
Air conditioning /
Electric heating
Industrial demand
Reservoir hydro plants
Supply
Demand
Power
price Cross-border
exchange balance
PV capacity
growth
CO2 prices Gas prices Crude prices Coal prices
Fuel forward curves
Weather impacts
Thermal power
generation
Comfort of
living
Energy
efficiency
Macro
cycle
Renewable
power
generation
A
B
C
D
RWE Supply & Trading | 14 April 2015 PAGE 8
A: German Power Demand:
Power demand is stabilising on low level
> Efficiency measures continue to weigh on power consumption, with the EU proposing an energy efficiency
target of 30% until 2030.
> Demand destruction prevails since the post-crisis recovery in 2010. However, it was slowing down in the
recent months.
> Data quality issues are increasing as the growing residential self-consumption of PV is based on estimates.
-20%
-15%
-10%
-5%
0%
5%
10%
15%
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Oct 14
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Average Load YoY Change
Demand declined
sharply in the wake
of the financial crisis
Post-crisis
recovery
Demand destruction
ongoing but slowing down
RWE Supply & Trading | 14 April 2015 PAGE 9
0
20
40
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200
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201
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Ins
talle
d G
W
Total Installed PV and Wind Capacity
Wind Onshore Wind Offshore Solar
0
2
4
6
8
10
2014 2015 2016 2017
Ne
w in
sta
lle
d G
W p
.a.
PV and Wind Capacity Growth
Wind Onshore Wind Offshore Solar> Solar installation growth was relatively low with
only about 1.9 GW installed until the end of
2014.
> Our 2015 capacity expansion forecast for PV is
set at 1.8 GW, but may vary depending on the
success of the newly introduced tender process
for ground-mounted PV. However, we do not
expect the official target of 2.5 GW to be
reached.
> On the other hand, German onshore wind
installations surprised to the upside in 2014,
partly as producers accelerated their projects in
anticipation of the EEG reform. In total 4.1 GW
were installed from January to December 2014.
> The wind capacity growth forecast is set at
4.7 GW for 2015, thereof 1.9 GW wind offshore
capacity.
B: German Power Supply (I):
Higher renewables growth in 2015 due to offshore wind
Installed Capacity (Dec 14):
- PV 37.89 GW
- Wind 38.85 GW
(thereof 0.95 GW offshore)
RWE Supply & Trading | 14 April 2015 PAGE 10
-6000
-4000
-2000
0
2000
4000
6000
2014 2015 2016 2017
New-build vs. mothballed/closed fossil generation capacity
Hard Coal Lignite
Natural Gas Nuclear
-1.7
GW
-1.0
GW -0.8
GW
-1.2
GW
C: German Power Supply (II):
Balance of capacity closures and new-builds tightens
> Taking into account recent updates, closures
planned for 2014-2017 exceed new builds by 4.7
GW.
> The hard coal unit Mannheim 9 with a capacity of
845 MW will be commissioned in June 2015.
Additionally, Vattenfall’s coal unit Moorburg A with
800 MW capacity will commence operations this
summer.
> Europe’s most efficient gas plant units, Irsching 4
and 5, with capacities of 550 MW and 846 MW,
have been scheduled to be decommissioned on
1st April 2016 as operations are not profitable.
> If a capacity market will not be implemented,
further gas and coal closures are expected.
Moreover, additional lignite closures are
anticipated in the long-term, if the extra climate
levy (proposal from economics minister Gabriel)
for old lignite plants is realised.
Moth
balle
d/c
losed N
ew
build
RWE Supply & Trading | 14 April 2015 PAGE 11
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5
€/E
UA
EUA Y1
D: Emission Allowances:
Trilogue discussions supportive
> Trilogue* discussions about the implementation of the Market Stability Reserve (MSR) started. The next
meeting is scheduled for 5 May.
> Controversial topics remain the start date and the amount of unallocated allowances in the MSR.
> A compromise solution would suggest a start date in 2019 or 2020 in return for less unallocated
allowances to be placed in the MSR.
* Trilateral meeting with EU Council, Parliament and Commission
RWE Supply & Trading | 14 April 2015 PAGE 12
D: European Gas Calendar Spread:
TTF curve flattens as prompt supply gets tighter
> An unexpected production cut of the Dutch Groningen field by 4.4 bcm in Q2 led to an extreme short
squeeze in February. In July 2015, the government will decide whether to cut the yearly target of 39.4 bcm
to 35 bcm or whether to catch up on the production backlog in H2’15.
> An unexpected jump in Russian gas exports by ca. 100 mcm/d in March led to an abrupt stop to the rally.
> A technical problem at the UK Rough storage results in 1 bcm less storage capacity increasing the UK
sum/win spread.
> The forward curve could flip further into backwardation due to more LNG supply and storage capacities.
-3
-2
-1
0
1
2
3
4
5
6
19
20
21
22
23
24
25
26
27
28
Jan
13
Ma
r 13
Ma
y 1
3
Jul 1
3
Sep
13
Nov 1
3
Jan
14
Ma
r 14
Ma
y 1
4
Jul 1
4
Sep
14
Nov 1
4
Jan
15
Ma
r 15
Sp
rea
d [
€/M
Wh
]
TT
F [
€/M
Wh
]
TTF Gas Front Year (FY1) vs. Second Front Year (FY2)
Spread
TTF FY1
TTF FY2
RWE Supply & Trading | 14 April 2015 PAGE 13
D: European Coal:
API#2 remains weak after a rebound from the 5y low
> The strong USD increases the margins for coal mining companies in their domestic currency. This implies
more downside potential in USD terms as effectively the marginal costs measured in USD dropped.
> The Columbian railway company Fenoco is not allowed to transport coal at night from the mines to the
harbour anymore. Since this was already the bottleneck of Columbian exports, the market will receive 1-
1.5 m tonnes less coal per month until the noise pollution problem is solved.
> Glencore contemplates shutting down some South African mines, potentially decreasing supply by 5
mt/year. It also outlined vague plans for mine closures in Australia. However, after the Japanese
negotiations where finished coal prices collapsed, unmasking all supply cut attempts as useless so far.
50
60
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80
90
100
110
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$/t
Month Ahead Coal Prices
ARA DES (Columbia sets price)
South Africa DES
USA DES
RWE Supply & Trading | 14 April 2015 PAGE 14
D: European Coal Calendar Spread:
API#2 contango stable
> Despite dropping prices the contango did not steepen again between FY1 and FY2, implying that the
current oversupply situation is expected to be a long-term issue. Only minor improvements are priced in.
> However, due to seasonally weak demand the current prompt strength seems overdone. If the Fenoco
problem is solved and the current oversupply situations worsens, a higher contango in API#2 could be
re-established on the front end of the curve.
-8
-6
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-2
0
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6
8
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Sp
rea
d [
$/t
]
$/t
API#2 Front Year (FY1) vs. Second Front Year (FY2)
Spread
API#2 FY1
API#2 FY2
RWE Supply & Trading | 14 April 2015 PAGE 15
D: Oil Calendar Spread:
Contango declining while prices rebound
> During the last 9 months, oil prices dropped significantly as the global oversupply became more imminent.
Main factors are the declining power of the OPEC and the increasing US shale gas production.
> Oil rebounded sharply in Jan/Feb 2015 when the attention shifted towards the rig count decline in the US,
as a result of lower oil prices. However, as storage levels kept increasing prices eased again. Currently,
worries about the Saudi intervention in Yemen were quickly compensated by hopes on a resolution of the
Iranian sanctions.
> From a fundamental point of view oil prices could drop more before a sufficient supply cut takes place.
-20
-15
-10
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0
5
10
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55
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rea
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bl]
$/b
bl
Brent Front Month (FM1) vs. Front Year (FM12)
SpreadFM1FM12
RWE Supply & Trading | 14 April 2015 PAGE 16
German merit order in 2014: prices and volatilities for
different hours of the year
1 Excluding nuclear fuel tax 1 Source: RWE
A sunny and
windy hour
A sunny hour
with high intraday volatility
A average hour
with low intraday volatility
A cold winter hour
with low intraday volatility
A winter hour
with high intraday volatility
Announced for closure
or closure candidates
Marg
inal co
st
(€/M
Wh
)
Renewables
Nuclear1
Lignite
Coal
Gas
Oil
Others
System
services
Capacity (GW)
RWE Supply & Trading | 14 April 2015 PAGE 17
European Power Overview:
European power prices falter
> The recent price hike, which was caused by a price recovery across coal, gas, oil and carbon, has stopped.
> Belgian power prices decoupled again due to uncertainty about the return of the damaged nukes.
> UK power prices had been pushed up by gas prices as Norwegian outages and Dutch supply cuts for H1 have
resulted in below seasonal gas storage levels. However, increased Russian flows helped prices down again.
> German power prices have mostly decreased due to “shut-in renewable feed-in”*. Nevertheless, flow-based
market coupling and more fossil closures provide some medium-term upside potential for German power.
UK: Coal to gas switch, coal plant
reliability very high this winter, all
nukes back online
BE: 2 GW nukes (Tihange-2 and
Doel-3) still closed due to serious
safety concerns and respective repairs
NL: Gas dependent, hard coal plants
finally commissioned
FR: ARENH decision postponed
DE: Renewables feed-in,
fossil mothballing
NP: Improved hydro balance
25
30
35
40
45
50
55
60
65
70
75
Jan
13
Ma
r 13
Ma
y 1
3
Jul 1
3
Sep
13
Nov 1
3
Jan
14
Ma
r 14
Ma
y 1
4
Jul 1
4
Sep
14
Nov 1
4
Jan
15
Ma
r 15
Pri
ce
[€
/MW
h]
Cal16 Baseload Prices
DE Cal16 FR Cal16 NL Cal16 BE Cal16 UK Cal16 NP Cal16
* In times of high renewables generation, cross-border constraints limit exports
RWE Supply & Trading | 14 April 2015 PAGE 18
German Power Calendar Spread:
Forward curve backwardation decline continued
> In the beginning of 2015 the backwardation in the forward curve decreased, as the extra climate levy
(proposal from economics minister Gabriel) for old lignite plants is planned to come into effect in 2017.
> Ongoing fossil plant closures and returning risk premiums (as a result of increasing volatility in the
prompt) should lead to further relative strength in the back of the German forward curve.
-6
-3
0
3
6
30
35
40
45
50
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Sp
rea
d [
€/M
Wh
]
DE
Ba
se
[€
/MW
h]
German Power Baseload Front Year(FY1) vs. Second Front Year (FY2) vs. Third Front Year (FY3)
Y3-Y1
Front Year (FY1)
Second Front Year (FY2)
Third Front Year (FY3)
RWE Supply & Trading | 14 April 2015 PAGE 19
Generation margin for hard coal plants surged
reflecting plant closures in 2016/17
> German clean dark spreads increased further while the backwardation is flattening. The recent rise was
caused by Gabriel’s proposal, as it would curtail power supply while decreasing coal demand.
> Tightening supply/demand balance is getting priced into Cal’16 and even more into Cal’17.
-0.5
0.0
0.5
1.0
1.5
2.0
2.5
3.0
3.5
4.0
4.5
-1.0
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1.0
2.0
3.0
4.0
5.0
6.0
7.0
8.0
9.0
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Dif
fere
nc
e C
al'1
6 -
Ca
l'1
7 D
ark
s [
€/M
Wh
]
Cle
an
Da
rk S
pre
ad
[€
/MW
h]
Clean Dark Spreads Germany
Cal'16 - Cal'17 Cal'15 Cal'16 Cal'17
RWE Supply & Trading | 14 April 2015 PAGE 20
Summary & Conclusion
What are the
power
fundamentals
telling us?
> Electricity demand stabilised on a low level.
> Despite reduction in subsidies, solar and wind generation will continue to grow in Germany.
> From 2015 onwards, plant closures will reduce the current generous capacity margin. Gabriel’s
proposal for an extra climate levy might trigger additional lignite plant closures.
> Carbon markets are supported by MSR discussions and the Gabriel proposal.
> The global hard coal markets continue to suffer from oversupply. Bullish news in the prompt were
shrugged off quickly.
> The Groningen production cut and less UK storage capacity tightened European gas prices, but were
partly offset by high Russian nominations.
> Crude oil markets remain fragile despite recent rebounds.
> Outright front-year power prices moved sideways. Additional plant closures and the introduction of
flow-based market coupling are supportive for German power prices.
> The backwardation on the power forward curve declined inducing a higher risk premium.
> Clean dark spreads in the back end of the forward curve are further increasing due to the
tightening fundamental picture.
> Fossil plant closures overcompensating renewable capacity additions support outright prices.
> Power prices outperforming coal prices drive dark spreads up.
> Gabriel’s proposal for an extra climate levy might further tighten the supply-demand balance and
introduce more risk premium.
What are the
primary fuel
markets telling
us?
What can we
observe in the
power and fuel
spreads
markets?
Conclusions
1
2
3
4