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Executives Stephan Lowis – VP, IR Peter Terium – CEO Bernhard Guenther – CFO Analysts Lawson Steele – Berenberg Vincent Gilles – Credit Suisse Deepa Venkateswaran – Bernstein Alberto Gandolfi – UBS Bobby Chada – Morgan Stanley Alex Karnick – Deutsche Bank Peter Bisztyga – Bank of America Merrill Lynch Deborah Wilkens – Goldman Sachs Lueder Schumacher – SocGen Andreas Thielen – MainFirst Ingo Becker – Kepler Cheuvreux Lawson Steele – Berenberg RWE AG ( OTC:RWNEF ) Q2 2015 Earnings Conference Call August 13, 2015 6:00 AM ET Stephan Lowis Good morning to everyone on the phone and to those who are joining us via webcast. I’m joined here by Peter and Bernhard, who will now lead you through the main aspects of H1 2015, and with that, I would like to hand over to Peter. Peter Terium Yes, thank you, Stephan, and good morning from me, as well. Let me come straight to the main topics. The financial performance in the first half of the year followed the same earnings trends already observed in the first quarter. Deteriorating realized margins in the conventional generation business were the main reason for the decline in profitability. Bernhard will go into more detail in a few minutes, along with the disappointing performance of UK supply business. Nevertheless, we can confirm the 2015 outlook for the Group. Our net debt improved significantly to €25.6 billion, mainly due to the successful disposal of RWE Dea. In the second quarter, we also finalized and inaugurated our two new offshore wind farms, Nordsee Ost and Gwynt y Mor. Their contribution is one of the reasons why our renewables business will most likely double its operating result this year. We are continuing to expand our retail activities in Central and Eastern Europe. In June, we decided to enter the Slovenian market. Initially, we will focus on electricity supply to households and target a market share of 10% by 2020. In Poland and Hungary, where we have already established electricity supply businesses, we will start new retail activities in the gas market. Here, the focus will initially be on industrial customers. With the issuance of three hybrid bonds earlier this year, we secured the refinancing of our 2010 hybrid bond. Consequently, we decided to call the €1.75 billion bond at the earliest possible date, this September. This clearly demonstrates not only our good access to the debt capital market but also our reliability as issuer. Over the past few weeks, policymakers in Germany and the UK have taken important decisions with regard to the direction they want to take for energy policy. Let me elaborate in more detail on these decisions. At the beginning of July and after a series of intensive discussions, the German government abandoned the plans of the Ministry of Economics to introduce a climate levy for all power plants. This levy would have had a massive impact on our lignite operations, potentially leading to the shutdown of some 7 gigawatts out of our 10 gigawatts and the associated opencast mines. The new proposal is more in line with government’s desire to avoid structural disruptions in the lignite industry. It foresees the transfer of older lignite plants with a combined capacity of 2.7 gigawatts into a strategic reserve and a closure of the four years in the reserve. It is envisaged However, important details of the payment mechanism have still not been confirmed, so that we cannot yet tell you which of our plants we will put into the reserve and what the net financial impact will be. This will very much depend on the technical, economical and regulatory aspects, which will be determined over the next few months. It is estimated that the strategic reserve will save some 12.5 million tonnes of CO2. In addition to the shutdown of lignite plants, the government is targeting a faster of CHP capacity, as well as increased energy efficiency improvements to meet its 22 million tonnes of CO2 reduction target by 2020. The second element of the proposed change in German energy policy regards the future energy market design. In the white book, the government confirmed earlier indications that it does not believe that a broad based capacity mechanism is the most effective way to maintain security of supply. Instead, it has opted for a revised competitive energy market design. It proposes a number of adjustments to the energy-only market, which should improve the price formation process on the wholesale market and the ability to respond to energy supply intermittency. As with the strategic reserve, a lot of details are still missing, so that an assessment of the proposals is difficult. However, we are sceptical whether this new energy only market will be able to provide sufficient incentives to retain power plants in the market or invest in new build capacity if it is required. Finally, the government also outlined the further course of action with regards to nuclear liabilities. We welcome to the government’s attempt to address the important questions regarding the management of nuclear liabilities. We are aware of our responsibilities as operator and have made sufficient provisions to cover our future obligations in respect to the nuclear de-commissioning and final storage. RWE does not reject on principle the idea of a different model to manage the nuclear liabilities, but it is imperative that the framework conditions of such a solution are reached in agreement with the industry. We are open to entering into a constructive dialogue with the government to find a safe and cost efficient way to carry out the nuclear exit. On July 7, the UK Competition and Markets Authority published its provisional findings report. We welcome the findings of the CMA, in particular, that there is no evidence of excessive profits in the generation business and uncompetitive behaviour in the wholesale market. Vertical integration was not found to have an adverse impact on competition. In its investigation, the CMA has reached seven provisional findings which give rise to adverse effects on competition. While we agree with five of those findings, we do not recognize the excess earnings mentioned by the CMA in the domestic customer and SME market. We also view the suggested remedy of introducing a safeguard tariff as problematic, because we do not believe it will enhance competition. Instead of it, it will introduce uncertainty with regard to market returns. The final report is expected later this year. Only then we will be able to assess the impact of any remedies on our business. Let me now come on to talk about something which is more within our control than political decisions on energy policy. In the context of our ongoing efficiency enhancement program, the Supervisory Board agreed on Monday to change the legal and organizational structures of RWE and its subsidiaries. This is a consequence of organizing our operations along the value chain over the last two years and also follows our management approach. It allows us to become leaner and more efficient in running our business. The change foresees the transformation of RWE AG into an operating company by pooling most of our German fully owned subsidiaries within it. In doing so, we can cut the number of legal entities, and with it the number of management and supervisory boards. It also reduces intercompany interfaces and unnecessary administrative processes. In the course of this change, we also decided to streamline our steering model and align the RWE AG Executive Board more closely to the operating business. Chief operating officers will in future oversee conventional generation, retail, grid and renewables. This will allow us to take decisions quicker, a prerequisite to be able to face the challenges of the ever changing market environment. The appointment of the new COOs will be announced once it has been decided by the Supervisory Board. The new structure will be in place by January 1, 2017. From my point of view, this is an important step, because it makes us faster and gets us closer to our customers. So far from my side, and now I would like to hand over to Bernhard, who will provide the details on our H1 financial performance. To you, Bernhard. Bernhard Guenther Yes. Thank you, Peter, and good morning from me as well. As in the recent conference calls, I will concentrate on the most important topics to leave as much time as possible for your questions. Let’s start with the development of operating result on slide 11. In the first six months, it fell short of the previous year’s number by 11%. The biggest effect is the decline in conventional power generation, mainly driven by a further deterioration of realized generation spreads. H1 shows a disproportionately high share in margin decline compared to our full year’s expectation. Furthermore, the earnings development in our supply UK division has decreased significantly. I will explain the details in a minute with the outlook for 2015. On the positive side, our retail business units benefited from normalized weather conditions, and in our renewables business we are now reaping the benefits of our investments of the past years. The operating result of RWE Innogy nearly tripled to €233 million. Slide 12 gives you the development below the operating result line down to adjusted net income. The non-operating result is down due to the accrual of provisions for legal risks, lower capital gains and a negative impact from certain derivatives. Our financial result improved mainly because of the sale of securities and improved interest accretion to long-term provisions. The numbers for H1 show a high tax rate. For the reported net income, the tax rate is 48%. For determining adjusted net income, it amounts to 43%. This effect is disproportionately high in H1 2015. Hence, for the year as a whole, we expect a tax rate for determining adjusted net income below 40%. The reason is that according to the IFRS rules, we can’t capitalize tax loss carry forwards, although they are not lost. We can use them later again, once the earnings situation improves. In the current situation, this is the main driver behind the high tax rate. For the coming years, we also expect higher tax rates of broadly plus or minus 40% for the same reason. The minority interests increased strongly, mainly as participations in our German sales and distribution division benefited from the one-off income from the sale of securities. Adjustments for the reconciliation to adjusted net income comprise the non-operating result, including tax effects. Furthermore, Dea is recognized in the 2015 adjusted net income with the pro rata interest on the sales price. It’s €25 million. On slide 13, we give you the development of our cash flow. It comes down by €1.3 billion to €0.7 billion. As explained during our Q1 2015 conference call, this is mainly a result of a revised purchasing policy for required CO2 emission certificates. This had a corresponding positive effect on our cash flow in 2014. Furthermore, we have an increase in accounts receivable in our supply divisions which is due to the weather effect. Again, this had a positive counter effect in 2014. The development of our net debt is explained on slide 14. It came down by €5.4 billion, mainly driven by the disposal of RWE Dea. In contrast to the trend of falling discount rates for pension provisions, we still saw until Q1 2014 we have in our H1 accounts a positive effect on the pension provisions from rising discount rates. We increased domestic discount rates from 2.1% at the end of 2014 to 2.3% at the end of June 2015. The respective numbers for our UK pension provisions are 3.4% and 3.7%. This led to a decline in pension provisions of approximately €0.8 billion. Furthermore, the issuance of the new €1.25 billion hybrids in April had a positive effect on our net debt. In line with the rating agency’s definition, we only account 50% of our hybrid bonds as debt. These positive effects were partly offset by a negative cash balance, mainly driven by the negative working capital effects that I have just explained and the development of the exchange rate for the British pound. As our net debt is one of the main areas of interest for the capital market, I would like to highlight that more than 70% of our net debt are provisions with long and partly ultra-long durations, as shown on slide 15. While for pension obligations the duration is approximately 18 years, it amounts to more than 20 years for nuclear and more than 30 years for mining provisions. Hence, refinancing risk is very limited. Let me conclude with the outlook for 2015. First, the Group’s outlook on slide 16. We can confirm our outlook for the Group as a whole, despite the adjustment of the outlook for our supply UK division. The outlook for our supply UK division is the only adjustment for our divisional outlook, as you can see on slide 17. For our UK retail business, we now expect the operating result to be significantly down on the previous year but just positive. In March, we expected earnings to be moderately above 2014. The new outlook reflects the deterioration in earnings in the order of at least €200 million compared to 2014. This is due to three main reasons within our domestic customer business, which are partly one-offs and partly reflect a deteriorating business operating in a highly competitive environment. First, a one-off which accounts for at least 50% of the earnings decline, we are suffering from burdens resulting from process and system related problems in our billing system for domestic customers. We have identified the problems and initiated solutions, but expect the process to last into 2016, so that the whole issue will be solved in 2017. In the last couple of months, we have recognized that our original expectations for this system related operational issue for fiscal year 2015 earnings were far too positive. Second, we have an ongoing trend of a shift from our standard rate to nonstandard rate tariffs, including tariffs with higher upfront discounts. The discounts are generally lower-margin contracts across the fixed period. Additionally, we are seeing a significant transfer within the nonstandard segment with customers selecting shorter contract periods, leading to a further margin decline. Again, the full year’s earnings impact will be significantly higher than our expectations in March. Compared to fiscal 2014, the share in standard rate customers has come down from 66% to 62%. Third, we are still losing customers and recognizing lower consumption from our existing customer base. As of June 30, we have lost approximately 100,000 domestic customers compared to December 31, 2014. We expect this trend to come down by the end of the year, but it is still higher than anticipated when we confirmed our divisional outlook in March and is clearly dependent on the competitive environment in the market. The UK retail market is one of the most competitive markets that RWE operates in across Europe, and this is seen by the rapid growth of small suppliers and the increased switching between tariffs, all indicating that customers are very engaged in selecting their energy needs. It should also be noted that in the current political framework we don’t have a level playing field, as small competitors don’t have to bear the significant burdens from government energy programs. Hence, most of the lost customers have signed contracts with the new players. This is of course a very disappointing situation for our UK retail business, but we are confident that we have initiated the right measures to turn the operations of our domestic business around and that we will be able to return to clearly improved returns in 2017. This assumes no further burdens from the CMA investigation. With this, let me hand over to Stephan for the Q&A. Question-and-Answer Session A – Stephan Lowis Yes. Thank you, Peter and Bernhard. Let’s move now to the Q&A session, and you all remember the rule, two questions only in the first round. So, operator, please. Operator Thank you. The first question comes from Lawson Steele, Berenberg. Lawson Steele Morning, everybody. Thank you. On trading, how confident are you that the year-on-year decline will be moderate and not significant? Obviously you’ve had a great Q2 with €80 million EBIT, but obviously there was a €7 million loss in the Q1. So as a norm, I guess, with trading there’s a lot of volatility, but I’m just wondering if you can help us gain some insight as to why you’re guiding for a moderate decline from 2014 and what confidence you have in that guidance. And secondly, just financial, really, is there any reason to double the H1 2015 depreciation, or rather, any reason not to double the H1 2015 depreciation/ amortization line to get about €2.2 billion, €2.3 billion for the year? And if I could just add an addendum on the UK supply, you said more than half of the €200 million was due to billing issues. Is it possible to be a bit more specific on that, and tell us how much is down to the other pressures, please? Sorry, that’s two and a half. Thank you. Peter Terium There wasn’t two and a half, there was three, but anyway. Bernhard Guenther Hi, Lawson. Maybe I can start with your question on trading and on the depreciation. I can also take this question, if I understood it correctly, because it appeared a bit indirect. On trading, how confident are we, I think you rightly pointed to the fact that trading naturally is a very volatile business, and therefore the confidence for any full-year forecast in trading is by definition always lower than in the other divisions. We are reviewing our main trading positions we take regularly, and we think we have a position also ourselves correctly. But it’s always hard to predict when the market will come around to make it materialize. So yes, it’s always a risk in trading full year’s guidance that it might deviate either on the positive or on the negative side. And your question, I think, on depreciation was why is it higher than what you would expect from just doubling the H1 numbers. That’s because we still see for the second half of the year new power plants, especially also wind farms, coming online, and therefore this drives up the full-year depreciation number to more than 50% of what you extrapolated from H1.On the billing issues, we don’t give any deeper split of the numbers or the other factors, except from the billing issues that, as we said, there’s the shift of customers, and this loss of customers and the lower consumption. So that’s all we quantify. Operator The next question comes from Vincent Gilles, Credit Suisse. Vincent Gilles My first question goes to Peter, is on the announcement of this major — let’s call it restructuring, on Monday. I understand you won’t be able to give us numbers or a lot of details, but I’m more interested in trying to understand when you believe that this restructuring will start feeding through, let’s call it the earnings or the quantum, or the economics of the Company is probably better put this way, just to try to measure how long it takes before you’re happy with the new structure. And my second question is to Bernhard. Could you give us a bit more details on this tax rate issue and why you cannot use some of your tax loss carry forwards? Maybe we would then be in a better position to quantify what less than 40% actually means in concrete terms. Thank you. Peter Terium Yes, Vincent. Let me start with the first one. Maybe I have to disappoint you all a bit, because what all of you call a major restructuring is not a major restructuring in my words. What we are doing is we are significantly overhauling the legal landscape. That’s not what I in operational terms would call restructuring. We are taking a lot of companies out and we are taking some supervisory boards out, but that does not impact the operating business directly. Now, what the operating effect of it is that it completes the change from a country based organization to a functional organization. And that has already started in 2012 with the establishment of GenCo, the generation company. That has been continued last year with the establishment of RetailCo, our pan-European retail division. And we’re just completing this move towards a functional organization, which by the way before 2012 already included Innogy and RWE Supply and Trading. So the last part we are completing this with is GridCo. So in so far, as far as what you would call a major restructuring, it’s not on the operational side. What it does, however, it creates a prerequisite of quite a lot of the programs that we are currently pursuing. If I look at what we would call lean steering, if I look at our new way of working, if I look at quite a lot of the support and service functions which we can further streamline, then the current legal structure, mainly in Germany, stands in the way of this further streamlining. So it’s not adding another major program, but it’s a prerequisite, it’s an enabler for all those programs that are already on its way, some of them which we will continue to announce in the next quarters going forward. Bernhard Guenther Yes. Hi, Lawson. This is Bernhard. With regard to the tax rate issue, the main reason why you see this adverse change in the IFRS numbers is that under IFRS there’s a rule that you can only capitalize tax loss carry forwards if you expect to be able to utilize them in the five forthcoming years. And so this is totally unrelated to the German tax code, where you are generally able to utilize or carry forward those losses into eternity, theoretically, so they don’t decay over time. It’s just the IFRS rules. If there is a tax loss now arising, as we saw it in H1 numbers in the tax accounting, you can’t use these losses, and therefore under IFRS, so there’s a disconnect between the accounting world and the tax/cash world that we observe there. Vincent Gilles What is the quantum of tax loss carry forwards you cannot use? Bernhard Guenther What is the amount or what was the question? Vincent Gilles Yes, yes, the amount. Bernhard Guenther Yes, we don’t give details on that. Vincent Gilles So just to carry on, on that, I apologize, but when you said below 40%, obviously it’s a little guess game between you and the analysts, but are we talking here about the early 30s, or are we talking genuinely close to 40% here? It’s a major impact on your earnings stream, obviously. Bernhard Guenther It’s probably rather the later than the former, so it’s certainly more in the upper 30s. Operator The next question comes from Deepa Venkateswaran, Bernstein. Deepa Venkateswaran Thank you. I have two questions. So, firstly on npower, you mentioned that you were taking some measures. Would you just elaborate on what measures you’re taking in order to basically get on top of the systems issue? And secondly, I mean, just a follow-on of the same one, obviously looking at it from competitors in the UK, I mean, someone like Centrica actually has reported far lesser losses, and in fact very high margins. Obviously, they didn’t have the systems issue for the residential business, so I don’t entirely see why you’re being so disproportionately challenging npower, keeping the systems issues aside. And the second question I had was on the credit rating and balance sheet. So Moody’s have put you on negative watch. You’re on BBB plus. How would you view your current rating, and are you comfortable with a one notch downgrade and what’s the repercussions of that? Thank you. Peter Terium Yes, thank you. It’s Peter Terium here. Let me start with giving you some broader context to UK and npower, and Bernhard will give you some further detail on the measures that we are pursuing. Now, whilst the magnitude of what we are now disclosing also surprises a bit, the fact that we have a problem in the UK was already detected by us last year. We recognized it. And I think the establishment of RetailCo as a pan-European function with a lot of knowhow in the area of retail helped us to discover that in the UK there is still a kind of a problem situation. We reacted on that by appointing a Chief Operating Officer, which we added to the board, a third person who is now digging out the last remaining problems which are there, and is starting to work on solving them. Now, in that process suddenly, that is where then the negative impacts come on, and in the P&L. That’s basically the context to it. And we are now working on them, and that’s what you will see [indiscernible] down in the P&L by the rest of this year. Bernhard Guenther Yes. Hi, Deepa. This is Bernhard. Maybe just to add to the second part of your UK question on also competitors are having a hard time but you don’t see there’s a significant downturn there, and one aspect clearly is that we are still also at in our UK retail business, especially the domestic part, number five or number six in most of the customer satisfaction rankings. And therefore probably we are suffering disproportionately from the intensity of competition, because this unfortunately tells that we have probably more dissatisfied customers than some other players. On the balance sheet and rating question that you asked, of course, a negative outlook that we’ve received is not cause or reason of delight for the CFO, so it’s something we don’t like. But as we’ve reiterated earlier, for us it’s also no reason to panic. Especially after the Dea deal, we are in a situation where our liquidity position is very much different from where we’ve been one year ago, or even nine months ago. And therefore we are consequently pursuing all the measures we have initiated in order to stabilize our balance sheet ratios and to improve them over time again. But ultimately, of course, it’s in the hands of the rating agencies how they judge this and what consequences they take from it. Deepa Venkateswaran Yes. So if they did downgrade you, do you want to target a BBB+ at all costs, or how do you look at that? Bernhard Guenther No, we have never committed recently to defend any specific rating at all costs. It’s the overall outlook that we have to take into consideration and rating is one, albeit important, aspect of that. Operator The next question is from Alberto Gandolfi, UBS. Alberto Gandolfi Thank you. Good morning. I have two on my side. The first one is could you please elaborate a little bit on the likelihood of the introduction of decommissioning nuclear farms? And is there a scenario under which you may be asked to contribute cash right away, let’s say in the next 6 to 12 months, year after year? And how would that change potentially your credit metrics, in your view? Second question is on your net debt to EBITDA. If we take a look at projections, looking at commodity outlook, power price scenario and the new measures of lignite, and so on, that ads on our numbers, your net debt to EBITDA will be exceeding 4.5 times, you know, within a year and a half. So would that be a comfortable level for you? Or do you think that you’re about to face what we might call a funding gap? And if so, how would you like to feel that one? Wouldn’t it make more sense perhaps to issue equity now and then upgrade medium-term CapEx to start a new cycle? Because you seem to be very forward looking when it comes to reshaping RWE to be ready for the new utility world in the next 10 to 20 years, so I wonder why wait if your vision is already so far ahead of most of your competitors. Thank you. Bernhard Guenther Alberto, maybe I’ll start with the nuclear fund and a few words also on the net debt over EBITDA extrapolation that you made. And I think you concluded with questions more around growth prospects, and so maybe Peter wants to chip in later. On the German discussions around the funding of nuclear provisions, this is ongoing. There is a live political debate, which was obviously triggered by the E.ON decision to split themselves up. And political Berlin has now awoken from a political perspective, the threat that this potentially poses, and this brought this slumbering debate around both the adequacy and the safety of nuclear provisions on our balance sheet back to life. And it’s hard to predict exactly what the outcome will currently be. You might have read that there is this so-called stress test currently going on, where an independent accounting firm is essentially re-auditing certain aspects of our accounting provisions. We will see. We expect results out of that for this year to materialize, and this will probably be then one input for the further political debate on what you do with it. The indications I currently have, whatever the outcome might be, is that when it comes to funding something, this would not be a deadline where you have to completely switch from balance sheet internal funding into an external fund within a timeframe of six or 12 months, but it would ramp up over time, maybe also in some proportion to the remaining lifecycle of the nuclear power plants, where you know that they are about to be finally decommissioned by 2022. And therefore, I think the effect on the credit metrics is something we also would have to discuss with the rating agencies, what view they take on that aspect. And this is depending on the outcome of the political debate. With your question on net debt over EBITDA outlook and let’s call it financial firepower, or what you call a funding gap, do we feel comfortable with the development of net debt over EBITDA? No, we don’t. And again, as with my answer to Deepa’s question, do we see it as a reason for panic measures? No, we don’t either, because that’s the main game changer. We perceive after the successful sale of Dea that rating, of course, still is important, but the refinancing risk and the refinancing needs of RWE are significantly lower than what they would have been before the sale of Dea. I don’t know if Peter wants to add something and then more broader context. Peter Terium Yes, you were absolutely right in concluding that our vision, our strategy goes clearly beyond utilities. It goes into new mega-trends and developments that will follow up on that. This is what we actively are working on. If you look back at the first three years of me at the helm, the cultural change that I’ve driven has led to the main efficiency enhancement emerging out of the organization bottom up, if you might want. So that is now coming through. And since last year I’m actively working on taking innovation under my responsibility. We have a presence in Silicon Valley, in Israel, in Berlin and in London which is not only bringing a lot of ideas into our Company; we also see that we have, as a result of the German Energiewende, a lot of products and business ideas that we can materialize and bring back to the places I’ve just mentioned before. That is what we are doing. At the moment this is, I would say, not on the basis of large capital investments. I think a lot of it can be done, whether it’s a start-up or whether there is embarking on a new business idea with not sizeable money, and then to speed it up. And that fits very well to our strategy, we’ve already had last year, by looking at polymers growth. That is also with little investment, and with a lot of return. And if we will find something which we think is very useful and absolutely fits very well to our portfolio and our ideas beyond utilities, then we’ll come up with it, but I’m sure we’ll find money for it to finance it at that moment in time. But there’s nothing that we have at this moment in our sleeve that we can communicate about. Operator The next question comes from Bobby Chada, Morgan Stanley. Bobby Chada Hi. Good morning. So, two questions. The first one, again, to follow up on the tax issue, Bernhard, just to make sure I understand it properly, is it now the case that until you start to grow what we would observe as operating result that the tax charge is going to stay at around this 40% level into the medium term? Or are there other restructurings that may help improve the profitability of the tax group, like, for example, some of the GridCo consolidations? And then secondly, to again follow up on I’m afraid, on the UK position. It just feels like the UK has had problems for a number of years now. And I appreciate that you added a COO last year. But do you think that the management structure and the actions you are taking are sufficient? Or have you already had a big review of it? Or do you feel that there is another review needed? Bernhard Guenther Okay. Bobby, this is Bernhard. Hello. I would start with the tax issue and the more general question on UK and further measures. I will then pass over to Peter. I think your broad qualitative assessment, Bobby, is right. So we are talking here, as I said, about a certain disconnect between the IFRS world and German tax accounting rules, which is based on German local GAAP accounting but still is not identical with the German local GAAP accounting under Handelsgesetzbuch. And this indeed means that there may be ways to address the tax loss issue under German tax accounting rules which are not visible under IFRS accounting, especially in operating result. Peter Terium Yes, and Bobby, on the UK, let me be very clear. We are not happy with the situation. We finished our analysis, that has led to the additional pressure on profit. And we are currently working on bringing new and even better, if I might say so, more decisive actions in place. But I hope you understand that whilst we are bringing those in place at this very moment, I cannot openly communicate about that. Operator The next question is from Alex Karnick, Deutsche Bank. Alex Karnick Yes. Hi. Thanks for taking my questions. Two for Peter, I think. First one is the capacity or the climate reserve, so to say. To what extent are you concerned that this could be violating state aid rules by the EU? And if that was the case, that’s very speculative but if that’s the case, what’s your view on if the government goes back to the initially very painful lignite tax or lignite levy? The second one would be a question on the strategic relevance or outlook for the generation unit. It is noteworthy that probably forward prices have rolled out further. It will probably barely break even, even after cost measures now. The outlook for power remains to be seen. And that, in particular, even with your new structure, you kept it as a legal separate entity. I was just curious on your thoughts about this topic. Thank you very much. Peter Terium Yes, Alex. Let me start with the first one. We certainly have intensively looked at the state aid rules with some internal and external legal advice and we think when you design it properly, then that can be avoided. And that’s not something which is imaginary. I think there’s a very, very fair chance that you can avoid it if you design it properly. Now, so far I’m confident the German government has not taken this decision without having an own opinion about the feasibility of the solution as well. And now we’re getting into speculation; I rarely like to do that, but I think in this case it’s appropriate. If this would not fly, I don’t think that a return to the initial is a logical consequence, because after the discussions that we have had, it became apparently clear, or maybe even abundantly clear, that the original solution would have been as disastrous for us as a climate levy. So I think the German government has been somewhat in shock of what they embarked upon, the original route. They just didn’t oversee all the consequences for lignite, for the industry, for employees and labor in the broadest context. So I don’t think it will go back to something which we originally had. We then need to go back to the drawing board and look what it then could be with something having comparable consequences, what the climate reserve has in place. But that’s the option, or the speculation. I think there’s a fair chance that this is going to fly, if we just do our homework on that one. Now, on the strategic outlook on generation, very well spotted, on generation, we are moving from a commodity play to a capacity play. And that’s why we believe that an integrated company is the right vision and the right strategy, because a capacity play from its risk profile is very close to where we see renewables and where we see our grid business and where we basically also see our large customer business. That’s why we are not from a vision and strategy looking at disintegrating the Group. However, this move from commodity play to capacity play will be a very bloody one that the industry is going through. And the question at the end of the day is going to be will we be able to stick to our vision, our strategy, or might it just be too costly for RWE to do so. And there are basically two effects which could lead us to draw the option that we have kept available, which is the disintegration of the generation division. That has been created as an option by keeping generation an independent legal company. The two factors or the two aspects that might influence them, one is the regulatory regime. The climate levy might be an example of that, but that is gone. Is there any other thing that is at the horizon? I don’t see it, but if it comes we are able to react to that. The second aspect is market development. Where power prices are today, I think we can pursue the vision of the integrated Group. If it would unexpectedly go further south and it would be significant, then we might need to reconsider whether generation might then eventually draw the rest of the Group into an unfavorable situation. That could be a situation where you then would call on that option. But as I said, it’s an option. Everybody can speculate on the likelihood. We at the moment, as we see it, just regard it as an in case of option. Alex Karnick Okay. If you allow me a follow-up on this, your reference to a commodity play developing towards a capacity play, what do you specifically mean by that, because I thought that the white book just recently ruled out a broader based capacity market for Germany, where naturally most of your capacity sits? Peter Terium Well, it does for the time being. When I say about vision and strategy, I’m not talking next three years. I’m talking basically end of the decade, getting into the next decade. And I think that the white paper, as it is right now, is a no regret what is in there. First prepare the energy only market. Let’s see what it does to the capacity. Might be adjusted, and let’s then look at what a next design may be. But then we’re talking, as I said, end of the decade and yes. Operator The next question comes from Peter Bisztyga, Bank of America Merrill Lynch. Peter Bisztyga Yes. Good morning. Two questions, firstly, back to the issue of credit rating, would RWE be able to function effectively at sub-investment grade, and would you be comfortable functioning at sub-investment grade, if necessary? And then the second question, just on tax again, can you give us some guidance as to what you expect your cash tax rate to be as opposed to your P&L tax rate, please? Bernhard Guenther Hi, Peter. This is Bernhard. With regard to the credit rating, you know that our aim is unchanged, to maintain a solid investment grade rating, and we would not like to speculate on any other scenarios. On cash taxes, that’s something where we don’t provide detailed numbers beyond what we have published Peter Bisztyga Okay. Can I ask a third question, then, seeing as I didn’t get an answer to that? Bernhard Guenther You’re already on the path to do so. Okay, go ahead. Peter Bisztyga Cheers. Thank you. Sure and I promise. Can you just tell us what the one-off profit from the sale of your offshore transmission grid was in renewable this year? Bernhard Guenther It was in the medium double-digit million €o range. Operator The next question comes from Deborah Wilkens, Goldman Sachs. Deborah Wilkens Yes. Good afternoon. Thank you for taking my questions. The first one is, with the outlook for UK supply so much weaker, was there any division where things looked a bit better that meant you could keep your full-year guidance? Question number one. Question number two. Can you help us with the net debt outlook for the full year? Do you expect to hold the first-half number? Bernhard Guenther Hi, Deborah. This is Bernhard. I think, on UK, your assumption is right that in the other divisions things are running operationally smooth, or even slightly better. But you know the size of our segments is pretty asymmetrical, so a slight improvement in one of the big divisions does not cause a revision of the guidance there, whereas of course a small or a similar absolute amount in the UK has a very different effect on net debt. For the rest of the year, or at the end of the year, we expect to come out at a similar number as H1 now. Operator The next question is from Lueder Schumacher, SocGen. Lueder Schumacher Good morning. Yes, two questions. One is on the nuclear stress test, where we should get the results I think by the end of September. What is actually the stress in the stress test? Is it interest rates? Is it future decommissioning costs? It would be quite interesting, what they’re actually stressing there. The second one is on the outlook for power prices and coal prices. They all seem to be heading in the wrong direction. Do the recent developments with the Chinese slowdown concern you at all? Bernhard Guenther Hi, Lueder. This is Bernhard. I’ll start with your question to the stress test. And we do share your amusement or slight irritation; however you want to call it, about the labelling. Because so far, what we’ve seen, it’s basically more a kind of re-auditing of certain aspects of our liabilities side of the balance sheet, or taking a more holistic view on the assets side. It’s not, so far as we can judge, similar to the bank or banking stress test that has been conducted recently. On power price, do you want to take that, Peter? Peter Terium Yes. How many digits behind the comma do want to have it, for which year, Lueder? Joke aside, on the short term; it continues to be a commodity and a currency play, what does coal do and what does the dollar do. On the longer term, let’s say two to three years out and maybe towards the end of the decade, it will depend on, for instance, what the government will decide on lignite, how quickly will that go into the climate reserve. Will that be in 2019, November of that year, or will that be in February of next year or somewhere in between? And I think that will have an impact on the capacity demand in Germany, and that might then indirectly have some impact on the power price. Operator The next question is from Andreas Thielen, MainFirst. Andreas Thielen Okay. Firstly, related to the statements on gas trading, gas midstream, would you be willing to give an indication how the operating results there is split between the two? And secondly, on hedging, would you be willing to give an indication how hedging on the outright power currently looks beyond 2017, i.e., have you hedged anything meaningful for 2018 already? And in relation to the hedging also, I understand the tax situation correctly, that based on hedging and mark to market you basically say it should not be a surprise that there will be no profits in generation more or less for the next five years, given the IFRS treatment? Bernhard Guenther Yes. Hello. So let’s do it one by one. Trading, gas midstream, we don’t provide a detailed split of the operating result there between the trading part, the prop trading part which you see in our numbers, and the gas midstream part. But I think we’ve also communicated earlier that the current numbers are still a bit depressed by the overall situation in gas storage, which is part of the gas midstream part. So that is a factor of force at work that you currently see in the numbers. Second question, with regard to hedging, post 2017, for 2018, we have hedged somewhat more than 20% for outright, so we are already active in that area. And it’s below 10% for the spread position. On your tax question, I’m not 100% sure if I understood it correctly, but I think that you cannot draw any direct inference from the development of operating result in generation to the treatment of tax loss carry forwards under German tax accounting in Germany and what this means. And I referred with the answers given earlier to, for example, Bobby’s question. Andreas Thielen Okay. Obviously, not using tax loss is the clear side of it, but on the other hand basically meaning that the earnings situation in generation also, as we all well know from the charts which you provide with the annual results, mean that profitability in generation is basically not going to return in the foreseeable future, which should not be a surprise but which is just a fact. Bernhard Guenther Yes, I can confirm that statement, yes. Operator The next question comes from Ingo Becker, Kepler Cheuvreux. Ingo Becker Thank you. Yes. Good afternoon. Also on the tax, please, will your restructuring change anything as regards the opportunity to use those losses in your tax accounts? And secondly, could you help us maybe to understand it a bit better even? Is this tied to individual divisions, should we model that tax alongside your generation plants/profits, or is that the way you’ve structured your tax accounts, is that rather a thing at Group level that we plug in for the Group that is rather independent of the developments at division level? Bernhard Guenther Yes. Hi, Ingo. So I’ll start with your second question. Yes, you’re right. So the IFRS numbers are taken from a Group perspective and this can diverge quite significantly from the different national tax groups which are relevant ultimately for cash accounting and the actual cash taxes that you pay. So, as I said, there is significant disconnect in there. And with regard to your question if the announced recently announced restructuring, especially within the German universe of RWE legal entities, if this might change the picture, let me respond to that. That does probably or any kind of restructuring which of course also affects the tax entities being touched opens degrees of freedom you would not have without the restructuring. Ingo Becker Which is a yes to my question? The restructuring may impact that tax outcome? Bernhard Guenther Yes. Ingo Becker Can I enquire, is that one of the major reasons to do the restructuring? Bernhard Guenther No, definitely. Peter Terium No. Ingo Becker Okay. Thank you. Peter Terium That was a double no. Operator The next question comes from Lawson Steele, Berenberg. Lawson Steele Yes. Hi. I have a second question. Thank you. On the nuclear fuel tax, so you’ve got the Federal Constitutional Court giving a ruling in the coming months. If the government were to win the case, do you think they might consider extending the tax beyond 2016? Do you put that chance at zero or not? Thank you. Peter Terium I think that’s pure speculation. There’s been this kind of a statement of the Ministry of Environment in the press. It has not been taken over by any of the other ministers. And I think this government, if you look at the Memo of Understanding or they call it Acht Punkte Papier, so the agreement that they made on the energy policy some months ago, it clearly states that a commissioner will look at the totality of nuclear issues. They have it on the table, they need to solve that, and I think it’s going to be something in a total package. That is what they are aiming for. Talks have not started so far, and we are readily waiting for any discussion that we could pick up in this context. Bernhard Guenther And maybe, Lawson, just to add to that, what Peter said, and to reinforce it from the pure economic side, what you would probably see then is that the operators of the remaining nuclear power plants would seriously reconsider the viability of these power plants if the tax was to be continued unchanged beyond 2016. So you might see similar stuff happening too, like with E.ON and Grafenrheinfeld, yes? And without giving you details, we can tell you that you might have seen more closures unless they were power plants who still currently expect a lease of life without nuclear fuel tax. Operator The next question is from Bobby Chada, Morgan Stanley. Bobby Chada Thanks. It was just to follow up on the tax issue one last time. At what point do you have to under accounting rules, would you potentially have to write off this tax loss that you’re currently carrying? Have you already reviewed that, or is it something that would be reviewed at yearend? Bernhard Guenther Hi, Bobby, I think you’re referring now to the tax accounting rules, yes? Bobby Chada The IFRS accounting rule, yes. Bernhard Guenther Yes. What you’re seeing is that we have basically not utilized tax losses, which economically equivalent to writing them off, or we have not been able to create deferred taxes out of that. So that’s exactly what happened. But this is, and I repeat just for the sake of clarity, totally independent from the German tax code, which does not know a kind of best before date for tax loss carry forwards. We can utilize them whenever in the future. We have taxable profits in the German tax group again, and however long it will take. Operator The next question is from Alex Karnick, Deutsche Bank. Alex Karnick Yes. Hi. A housekeeping question to Bernhard, was there anything special in the H1 generation result? That seems to be down more than 50% was the consensus, and I guess implicit Group guidance and stuff requires some level of €600 million, €650 million for full year, which is down 30%. Anything special in there and why should that get better in H2? Thanks very much. Bernhard Guenther I think there’s no special single event that we are referring to. We think the margin decline is not distributed equally over the whole year. So there was a steeper margin decline in the first half of the year than what we expect for the second half. Alex Karnick So it’s a base effect over the last year? Okay. Bernhard Guenther Yes. Operator We have the last question from Deepa Venkateswaran, Bernstein. Deepa Venkateswaran Thank you for taking my additional questions. The first two questions, you mentioned something about clearing a slightly higher risk provision in your non-operating item and there is a note about some arbitration risk increasing. Could you give us some color on what is this and is it something material? Secondly, the commission that the government is going to appoint to look at all the nuclear options, could you give us a little more color on who will appoint this commission? Will there be any kind of industry representation of any sort or would it be external experts, or could it be just politicians? And do you have any opportunity to be represented or the industry more broadly in this commission? Thank you. Bernhard Guenther Hi, Deepa, I’ll take the first question on the increased risk provisions that you refer to. These are ongoing arbitration cases, and we don’t comment them further for confidentiality reasons. Peter Terium So hi, Deepa. Let me take the second one. I’m not sure how much you followed the previous commission that we had on the exit of nuclear, but it’s very clear. This commission is not going to be an ethical or an ethics commission. It’s going to be having experts on board. It, yes, will have some politicians on board as well, to get the support and the coverage in the German Bundestag. But the main driver will be industrial experts, independent if possibly, so not necessarily representatives from the operators but surely close enough to them to come to wise and decent solutions and proposals. Deepa Venkateswaran Thank you. Can I just add a follow-on there, if you look at all these expert reports floating around in Germany, to the extent that they’re sponsored by particular political parties, they come to a very obvious conclusion. If they’re antinuclear, they basically conclude that your provisions are not enough. So how would you and the industry be confident that this is sufficiently robust and independent? Peter Terium Very simple I would not quality them as expert reports, what is floating around is opinionated very often written down without consulting the energy companies involved, we’re trying to avoid that with the commission is being established. So although no representatives of the operators will be in it, there will be constantans and they will be cooperating with the commission very closely. Some of the material that you have seen floating around has been within and without talking to the experts on our payroll that could have given valid information which might have led to the difference conclusion as what was in those papers. Operator There are no further questions. Stephan Lowis Okay. Then, thanks for dialing in and asking all the questions, especially around the tax issue. The team — IR team is still available to explain it to you. And also thanks to Peter and Bernhard, and we will see each other on the road over the next couple of weeks. Bye-bye. Operator Ladies and gentlemen, thank you for your attendance. This call has been concluded. You may now disconnect.