Slowing economic growth in core RWE markets
As set out under Environment, the general economic picture has worsened dramatically as of late. Declines in the price of energy fuel and other major commodities are among the few stabilizing factors. The impact of the crisis on financial markets on the real economy is already becoming evident. Therefore, nearly all economic research institutes have lowered their growth expectations for the year underway. However, these prognoses reflect the economy’s relatively dynamic development in the first half of the year. In Germany, our main market, the real gross domestic product (GDP) is expected to grow by 1.8 % (2007: 2.5 %). The prognosis for the UK economy is slightly less favourable. GDP growth for 2008 in the UK is anticipated to amount to 1.0 % (2007: 3.1 %). The financial crisis and shrinking global demand are also being increasingly felt in the economies of Central Eastern Europe. Hungary is in fact on the verge of a currency crisis. But there is still no recession in sight for the region as a whole, where the growth rate for 2008 is expected to range between 4 and 5 %.

Raw material prices far above 2007 average despite recent declining trend
The situation on electricity and raw material markets will be dominated by the financial crisis and the weakening global economy for the foreseeable future, although demand is unlikely to lose a lot of momentum over the long term. Oil prices dropped considerably again in October. By the end of the month, a barrel of Brent cost a mere US$ 61 (€ 48). Nevertheless, the price of Brent is likely to clearly exceed the average for 2007 (US$ 72 per barrel) for the year as a whole. As gas supply agreements are commonly linked to price developments on the oil market and price formulae contain a lag, natural gas prices will be markedly higher year on year as well. Hard coal prices have more than halved since their July record. At the end of the October, a metric ton of hard coal traded at US$ 99 (€ 78) on the Rotterdam spot market (including freight and insurance to Rotterdam). Despite this, the average price witnessed in 2007 (US$ 89) will be surpassed substantially. The same applies to German BAFA prices (2007 annual average: € 68 per metric ton of hard coal equivalent).

CO2 emissions trading: significant shortage of certificates
As explained earlier, a substantial shortage of certificates can be expected as compared to the first CO2 emissions trading period (2005 to 2007). However, the financial crisis and fears of recession had a price-dampening effect in this area as well. As of October 31, emissions certificates for 2008 were quoted at € 18 per metric ton of CO2. At the same time, emissions certificates from “Clean Development Mechanism” projects traded at € 15.

Prices on European electricity markets remain high
Electricity prices on European exchanges reflected the recent drop in energy fuel prices, albeit to a disproportionately small extent. German base-load contracts for delivery in 2009 traded at € 68 per MWh at the end of October 2008. In the UK, the price level is higher. At the end of October, the forward for 2009 base-load deliveries traded at £ 61 per MWh (€ 78 per MWh). The RWE Group has sold forward almost all its 2008 electricity production. We have also sold a large part of our electricity generation for subsequent years (already more than 80 % for 2009 and more than 50 % for 2010 in Germany). We expect electricity prices to remain high in the future as well. Although the factors fundamentally influencing the electricity market are presently overshadowed by the financial crisis and anticipated recession, they will remain essentially unchanged. Many European countries are likely to continue experiencing increasingly tight generation capacity. Even in the event of a recession, demand for electricity will not be affected substantially.

Revenue expected to be higher year on year
External revenue earned by the RWE Group in 2008 is anticipated to surpass last year’s level. We expect growth in excess of 10 %. This and the following forecasts are based on an assumed exchange rate of £ 0.80 / €. The growth in revenue will be largely driven by electricity and gas price increases, with which we pass through to the customer the rise in procurement costs.

Stable earnings trend despite higher CO2 costs and grid regulation
We confirm the 2008 earnings forecast we published in our 2007 annual report in February this year. The only exception is the prognosis for net income. Originally, we had anticipated a rise of more than 10 %. We now expect that net income will decline slightly due to the one-off charge resulting from the initial public offering of American Water. This expectation is, however, subject to the development of American Water’s share price. There will be no effect on EBITDA, the operating result or recurrent net income, which is the key determinant for calculating the dividend. We continue to expect to at least match 2007 levels in terms of both EBITDA and the operating result. The basis for this is the organic success of our German power generation activities and of our upstream business. But our 2008 earnings will be dampened by about € 1.6 billion due to stricter CO2 emissions trading conditions as well as cuts in our German grid fees mandated by the regulator. Recurrent net income, which is adjusted for one-off effects, is expected to increase by more than 10 %. We anticipate that the earnings contribution from the efficiency-enhancement programme will amount to approximately € 100 million in 2008.

Capital expenditure stepped up
The RWE Group’s capital expenditure on property, plant and equipment will be far above the level achieved in 2007. At present, we anticipate capex to be in the order of € 5 billion (without American Water). We expect RWE Power to post the greatest rise. Construction of the twin-unit hard coal power plant in Hamm, Germany, has been started this year. Work on the gas-fired power plant in Lingen, Germany, and on the dual-block lignite power plant in Neurath, Germany, has made further progress. The commissioning of these two plants is scheduled for 2009 and 2010 / 2011, respectively. Our upstream subsidiary, RWE Dea, is investing much more in gas production — above all in North Africa. RWE Energy has increased its capex budget substantially as well. It will spend some 80 % on the grid business. Other funds have been earmarked for gas storage projects. RWE npower will also step up capital expenditure. Our main projects in the UK are the new gas-fired power stations in Staythorpe and Pembroke. RWE Innogy’s focus is on the construction of wind power plants in the UK and Poland.

Net debt on par with 2007
Despite the share buyback, dividend payments and the marked rise in capital expenditure, net debt is expected to be roughly on par with last year’s level by December 31, 2008. The basis for this is our assumption that we will have placed the majority of the shares in American Water on the stock exchange by year-end, which would allow us to deconsolidate the US water utility’s liabilities. American Water has been independently financed since the end of 2007. All of the intragroup loans have been repaid.

Employee headcount: significant rise expected
This financial year, we anticipate that our workforce will expand across all divisions. Our current planning envisions the payroll growing by more than 3,000 employees, in part due to the rise in investing activity.

Research and development: budget enlarged
We intend to spend more than before on research and development (R & D). Costs in this area in 2008 are likely to be marginally higher than in 2007 (€ 74 million), but we will increase spending considerably in subsequent years. We will continue to focus on projects to improve efficiency and reduce emissions from electricity generation. More than half of our R & D budget has been earmarked for this. A milestone we will pass is the start of the test run of our demonstration lignite pre-drying plant in Niederaussem, Germany, scheduled for the end of the year. We intend to extend the cooperative ventures with partners in the chemicals and plant engineering industries initiated last year, focussing on methods to separate carbon dioxide from flue gas. In addition, by launching RWE Innogy, we set the course towards intensifying R & D activities in the field of renewable energy. Furthermore, we want to make a contribution to securing and refining know-how in the field of nuclear energy over the long term. This will allow us to keep open the option of making use of this climate-friendly technology in a changing energy industry and social environment. We are also active in the field of power grids. Steps we take in this area are directed to intelligent grid usage and innovative energy measurement.


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