Conventional European Power Generation Assets: Are they Attractive Targets for Overseas Investors? Presentation to the EPG Strategy Summit, by Martin Giesen, Chairman, Advanced Power AG 26 November 2014

The state of the power generation sector in Europe Overview The state of the power generation sector in Europe Why power generation asset ownership will change What drives the sellers What drives (overseas) buyers Hurdles that need to be overcome   EPG Summit, Amsterdam, 26 November 2014

The State of European Power Generation Since 2007, generators have lost €500,000,000,000 (= half a trillion) of market capitalisation Spark spreads in most European markets remain negative Dark spreads are positive, but insufficient to generate an acceptable return on investment Large amounts of generating capacity have been shut down or moth-balled Governments in key markets are concerned about capacity margins and implementing or considering capacity payments The ETS is ineffective (not a design flaw, but a misalignment of objectives) Belief in market structures is shaken EPG Summit, Amsterdam, 26 November 2014

The Causes Recession Subsidised renewables Demand destruction and low growth potential Subsidised renewables A large part of conventional generation has been pushed out of the merit order Conventional over-build in the “good times” Some markets (e.g. Spain and the Netherlands) have experienced significant overbuild EPG Summit, Amsterdam, 26 November 2014

Why Ownership Will Change Before (the financial crisis and the renewables boom) Conventional power generation was a necessary part of a balanced utility portfolio Gas-fired generation was expected to be required to cover mid-merit or base-load demand European utilities had strong balance sheets and disposed of their regulated network subsidiaries Utility investors were comfortable with utility generation portfolios After Gas-fired plants are idle or, at best, operating as peakers European utilities have weak balance sheets and less regulated activities Utility investors are even more focused on long-term, stable yields EPG Summit, Amsterdam, 26 November 2014

What Drives the Sellers European utilities need to bolster their balance sheets, stabilise their income/cash flows and de-risk their activities They require focus on core markets and more exposure to: Regulated activities Long term subsidies (e.g. renewables) Low risk, relatively stable activities, e.g. retail They have to decrease their exposure to Merchant generation assets Trading and merchant portfolios Selling generation assets, particularly gas-fired plants, shrinks utility balance sheets and eliminates some merchant exposure EPG Summit, Amsterdam, 26 November 2014

An Example RWE Strategy EPG Summit, Amsterdam, 26 November 2014 Source: RWE March 2014 EPG Summit, Amsterdam, 26 November 2014

What Drives the Buyers Large financial investors, such as pension funds, private equity, hedge funds, take a portfolio approach to risk To varying degrees, they seek to supplement traditional, passive investments by alternatives Direct investments in infrastructure assets Investments which incorporate various degrees of merchant risk Hedge funds: high degrees of risk with very high return expectations Pension funds: higher returns than traditional investments (e.g. government bonds) With a “sufficient” return in downside scenarios EPG Summit, Amsterdam, 26 November 2014

What Drives the Overseas Buyers Overseas investors are seeking geographical and market diversification Europe remains a suitable target area for many international infrastructure investors There is a recovery “story” in some European markets Many investors already have exposure to renewables in Europe and believe they know the markets A number of recent transactions (e.g. UK, France, Portugal) are beginning to establish transaction and pricing histories EPG Summit, Amsterdam, 26 November 2014

Hurdles that Need to be Overcome Price! Origination: Matching of targets and investors requires detailed knowledge of both – the potential assets as well as the objectives of potential investors Transaction: The assets are large and complex, hence, the transactions will be bespoke and may require “out-of-the-box” thinking Asset Management: In most cases, the existing, strategic owners will step completely out of the asset. Overseas investors will require teams and knowledge to manage the assets going forward EPG Summit, Amsterdam, 26 November 2014

Summary Conventional generation in Europe has become risky merchant generation European utilities are forced to dispose of risky conventional generation assets, particularly in non-core areas Financial investors are seeking yield and adding some merchant exposure to their portfolios – also in Europe Price expectations are becoming aligned Qualified support is required for origination, transaction and asset management EPG Summit, Amsterdam, 26 November 2014