Letter from the CEO

Dear Investors, (text)
Dr. Jürgen Großmann, President and CEO of RWE AG (photo)
Dr. Jürgen Großmann
President and CEO of RWE AG

When I wrote to you a year ago, our world was a different one. No one could have suspected that we were about to face the biggest financial crisis in the post-war era. Its extent and consequences still cannot be predicted entirely. But one thing is certain: The global economy is on a downward trend that is steeper than we have witnessed in decades. There are no signs of improvement. On the contrary, uncertainty is deeply rooted. Our customers in the automotive, chemicals and steel industries are reporting record falls in demand. Confidence in the reliability and performance of the banking sector has reached its low point. Indeed, many now question the entire system and are second-guessing the fundamental principles of the market economy. State intervention in the economy has become the order of the day. Could we have imagined this a year ago? Certainly not.

What do the financial crisis and the recession mean for our RWE? Even for an energy company such as ours, the negative news is growing: Industrial energy consumption is on the decline, and customers are experiencing difficulty in making payments. Financing costs are on the rise and politicians are increasingly inclined to regulate functioning market processes more intensely.

That is one side of the coin. The other is that the business we conduct with our main products–electricity and gas–is both robust and only marginally cyclical: The economic situation has hardly affected demand from the 20 million households we serve. And all of these customers live in EU member states, which have framework conditions that we have been familiar with for many years. Our financial situation is extremely robust. We achieved our earnings targets for 2008. We have already secured a significant portion of the margin in our electricity generation business for 2009 and 2010 through forwards we concluded early on. Our business outlook is positive despite the crisis. We aim to increase recurrent net income–the yardstick for determining your dividend–considerably until 2012. Our payout ratio of a one-time 71% for the fiscal year that just ended and 50 to 60% in the future is above the market average. The dividend of €4.50 per share for fiscal 2008, which we will propose to the Annual General Meeting, is the highest since the company’s inception. Furthermore, we have reduced debt substantially over the last few years. While others went on shopping sprees, we focussed on organic growth and avoided expensive acquisitions. RWE’s balance sheet is therefore extremely healthy. Investors worldwide appreciate our cash-strong operations and subscribe to our bonds, as evidenced once again by the most recent issuance. This gives us a good basis for providing solid financing for upcoming investments.

There are not many companies which can make the same claim at present. This is why we believe we have to take on responsibility as well. We plan to invest about €26 billion to expand and modernize energy infrastructure by 2012: in environmentally friendly power plants, supra-regional and cross-border electricity grids, gas pipelines and storage facilities as well as in gas and oil production. Besides being the largest capital expenditure programme in our 111-year history, this also makes us one of Europe’s largest private investors. As a result, we will secure and create jobs at RWE as well as at equipment providers and their suppliers. This economic package spares state budgets while improving security of supply. But we need the right political framework to implement this programme.

The gas dispute between Russia and Ukraine has once again demonstrated that a warm living room cannot be taken for granted. And it proves that although gas is a good fuel for power stations as far as the CO2 balance is concerned, it can quickly become scarce. This is why we will use equal shares of gas and coal in our current power plant new build projects. No other utility is currently building more generation capacity in Europe than RWE. At the same time, we are making the greatest possible effort to accelerate the preparation of the construction of the Nabucco gas pipeline and to increase our gas storage capacity. RWE Dea is exploring and tapping new gas and oil reserves in Europe and North Africa. Last, but not least, we are fighting in Berlin to give nuclear energy a future in Germany as well. After all, nuclear power is not only affordable, but given the uncertainty about other fuel supplies, it is also secure. All the more so in times of economic crisis when we must do anything it takes to strengthen the competitiveness of our energy-intensive customers.

A year ago, I explained our Strategy Agenda 2012 in my letter to you. Its guiding principle is “More Growth, Less CO2.” Since then, we have explored numerous options with which we can grow profitably while reducing our emissions. The investment programme that I mentioned earlier will take us a long way down this road. In this context, our main priority is the rapid establishment and expansion of our new division for renewables, RWE Innogy. Our focus on organic growth so far is paying off. This may take a big effort and a lot of time, but you can expect RWE Innogy to deliver results with double-digit growth rates from 2010 onwards.

The takeover offer for Essent is a major step forward in implementing the Strategy Agenda 2012. Essent is a leading energy company in the Benelux region. Due to the large share of the generation portfolio accounted for by gas-fired power stations, the company’s CO2 intensity is much lower than ours. At €9.3 billion, the transaction value is high, but it is appropriate given Essent’s attractiveness to our business. A glance at the map of Europe reveals that no other region is closer to RWE’s supply area than the Benelux markets. Essen is only a one-hour car drive from Arnheim, the location of Essent´s headquarters. Combining Essent with our German activities will put us among the leaders in North Western Europe. It is likely that markets in this region will continue to converge. Furthermore, Essent is set up similarly to us with electricity generation, energy trading as well as electricity and gas supply operations. As a result, the integration risks are relatively low. If everything stays on schedule, we will close the acquisition in the third quarter of 2009. We will then concentrate entirely on integrating the company. Further acquisitions are conceivable, albeit of a significantly smaller scale. We are looking into how we can gain footholds with investments in established local companies, above all, in South Eastern Europe. We expect this region to post far above average growth rates in the future.

Constant improvement is another element of our Strategy Agenda 2012. Six months ago, we doubled our efficiency-enhancement goal to €1.2 billion by 2012. Taking 2007 into account, we have already realized €200 million in savings and are therefore on track. We largely reduce costs and increase revenue by improving the efficiency of our grid and power plant operations. At the same time, we are sifting through all our business processes–especially those relating to administrative functions–and simplifying the Group’s organizational structure. But efficiency is not the only item on the agenda here. We also want to adapt to new market trends–faster than our competitors. This year, we will realign our regional supply activities with a view to creating a consistent, nationwide stance in Germany. In addition, changes in regulation require us to reorganize our electricity and gas grids.

Unfortunately, our demonstration of strength through billions of euros invested in supply security and crisis-proof jobs during this period of economic weakness is often counteracted by political decisions. The debate on energy policy conducted in recent years and decades is deadlocked. This is a great worry to me. The full auctioning of CO2 certificates from 2013 onwards will make the construction of new coal-fired power plants virtually impossible under the conditions that are foreseeable for Western Europe at present. Gas-based electricity generation and energy from renewables undoubtedly make sense, but they create new dependencies as well. German nuclear power is still headed for a political dead end, while steps to ensure its long-term viability are being taken elsewhere. Varying regulatory conditions within the EU are blocking investments and competition. We will not stop promoting necessary change with constructive suggestions and initiatives on all political levels. “Do it” is the motto of this annual report and it reflects our ambitions in this regard. We demonstrate solutions, including innovations in CO2 avoidance in power production and vehicles, with huge investments in environmentally friendly power plant technology and energy efficiency Glossary, and with a high degree of voluntary transparency.

My conclusion for the new financial year is that the recession will not fail to leave its mark on RWE. The political headwind is still strong, but our business model is weather-proof. We are pursuing strategies that will ensure the company’s success over the long term. Furthermore, we have identified numerous measures which, once implemented, will immediately enable us to react more quickly, become more cost-efficient and therefore more competitive. Moreover, we have a team of 66,000 highly motivated employees in twelve European countries, who tackle issues with determination. My fellow board members and I would like to take this opportunity to express our sincere gratitude to them. Our thanks also go out to you, our shareholders, for your support on which we continue to build. After all, in times of crisis, trust is the most important currency.

Sincerely yours,

Dr. Jürgen Großmann
President and CEO of RWE AG

Essen, February 13, 2009