E.ON Russia: Unlocking the Value

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E.ON Russia: Unlocking the Value Q1 2011

Agenda

Russian power market

E.ON’s power business in Russia

Key take-aways

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Russian power market Overview

4150 3725

4000 3000 2000

1115

Capacity commissionings

972

1000

870

634

597

542

CAN

GER

FRA

Consumption driven by industrial demand 15%

0 PRC

JAP

RUS

IND

Acute need in large-scale replacements 1971-1980 31,8% 1961-1970 23,8%

10% 5% 0% 1998

1999

2000

2001

2003

2004

2005

2006

2007

2008

2009

2010e

-5% -10%

US

3

#4

2

2 GDP vs power consumption

~1,000 TWh/a electricity market

1981-1990 25,4%

1991-2000 1951-1960 8,7% before 1950; from 2001 6,5% 2,4% 1,4%

y ~ 90% of total 220 GW older than 20 years y 97 GW (46%) exceeded its lifespan

GDP

4 Energy Ministry’s estimates

Power production 2009, TWh

1

Power consumption (before 2006 - production figures)

Russia’s reserve margins close to optimal 30% 20% 10% 0% 2010e

2011e

2012e

2013e

Est. reserve margin

2014e

2015e

2016e

System requirement

Market fundamentals are here to stay and improve as economy growth is back on track Source: BP Statistical Review 2009, Federal Statistic Service of Russia; System Operator, Ministry for Economic Development, Market Council, Energy Ministry, E.ON estimates

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Russian power market Liberalization Liberalization scenario – wholesale market (%) Liberalization complete

5

10

15

25

y Liberalization ratios apply to the power and capacity volumes included in the FTS balance for 2007 (ex-residential)

30 50

60 80

95

90

100 85

75

70 50

40 20

1H 2007

2H 2007

Regulated

1H 2008 Liberalized

2H 2008

1H 2009

2H 2009

1H 2010

2H 2010

2011

Liberalized: New capacity + deviations from 2007 balance

y The newly commissioned (2007 on) capacity and power produced from that capacity are sold at free prices y Capacity and electricity sales to the households (ca. 15% of Russia’s total consumption) remain regulated

Stepwise liberalization of the Russian wholesale electricity market completed on schedule Source: Liberalization scenario approved by the government decree No. 207 of April 7, 2007

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Russian power market Electricity market – merit order First pricing zone (European Russia/Urals)

Second pricing zone (Siberia)

Assumptions: all installed capacity available; CHPs in co-generation mode; some minor power plants excluded; no grid constraints. Illustrative.

Nuclear

Price (RUB/MWh)

Price (RUB/MWh) Hydro

Est. min demand

E.ON power plant

Est. min demand

E.ON power plants

Coal and gas

y Dominated by fossil-fired and nuclear plants, old inefficient gas units normally set the price

Hydro

Coal plants and regional CHPs

y ~50% based on the run-of-river plants, another ca.50% represented by coal and lignite blocks

E.ON flagship plants well positioned to benefit from liberalization of power and gas markets Source: E.ON estimates

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Russian power market Non-regulated prices Day-ahead electricity price development Recent developments 1000

RUB 881 (€222)/MWh

RUB/MWh

800

RUB 665 (€151)/MWh

600

RUB 508 (€132)/MWh

400

RUB 432 (€101)/MWh

200

Mid- /long-term perspective

0 Jan 07

y Recovery of power demand (+4.3% in 2010 vs 2009) provides strong support to spot prices y Additionally, spot power price in 1st zone picked up on the back of a gradual gas tariff increase

Jul 07

Jan 08

Jul 08

Jan 09

Jul 09

Jan 10

Jul 10

Jan 11

Monthly avg. First zone (Europe/Urals)

Monthly avg. Second zone (Siberia)

12M avg. First zone (Europe/Urals)

12M avg. Second zone (Siberia)

y Increase of domestic gas prices approved by the government to push power prices up y Weak grid interconnections lead to tight reserve margins and higher prices in particular regions

Demand, weather and input fuel costs drive power prices on the day-ahead market 1. Based on 12M09 average EUR/RUB rate of 44.20. 2 Based on 12M10 average EUR/RUB rate of 40.21. Source: Trading System Administrator, Central Bank of Russia.

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Russian power market Why power prices set to rise? Main factors affecting the power price development Rising fuel costs y Gas price to rise 15% p.a. in 2011-2012, heading for export netback parity

Demand pick up y Dependent on economic recovery, clear green shoots in 1H2010 y National economy growth well supported by state spending

y Coal price to rise broadly on par with inflation or faster

y Formally, reserve margins stable (20-25%1), albeit not lax y Margins significantly vary across Russia, very tight in some regions Suboptimal reserve margins

Power price

y Relatively weak grid infrastructure prevents interregional market coupling Grid constraints

Rising fuel costs and incremental demand should provide upward support to power prices 1. Source: Energy Ministry

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Russian power market Demand correlation with economic and industrial development

15,0%

15%

10,0%

10% 5%

Real GDP

5,0%

1,015

0,0% -7,5%

-4,5%

-1,5%

1,5%

4,5%

7,5%

0% Jan-08 Apr-08 Jul-08 Oct 08 Jan-09 Apr-09 Jul-09 Oct 09 Jan-10 Apr-10 Jul-10 Oct-10 -5%

-5,0%

-10% -10,0%

y = 2,0475x + 0,0151 R2 = 0,8208

-15,0% Power production

y Power production/demand highly correlated with economic development and industrial production y Industrial consumption makes up more than 60% of total national power consumption

-15% -20% Power production, y-o-y

Industrial production, y-o-y

y ~5% contraction of power production in 2009 stemmed primarily from weak industrial demand y 2010 figures exhibit strong recovery on the back of increasing exports and domestic consumption

Industrial demand drives Russia’s power consumption, residentials make up a mere ca.15% Source: Federal Statistic Service, System Operator, E.ON estimates

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Russian power market Fuel prices Domestic vs export gas price (RUB/mcm)

Domestic gas price (reg. tariff, RUB/mcm) 4000

12000 ~3,300 +15%

3000

Gazprom’s achieved European price: depends on oil, includes transport costs and export levies (~50-55%)

9000 RUB/mcm

RUB/mcm

+15% +26%

2000 1,355

+19% +28%

6000

1000

3000

0

0 2007

2008

2009

2010

2011e

2012e

2012e

y Domestic gas prices remain predominantly regulated, but are set to grow by 15% p.a. y Gas price increase to drive power prices in the European Russia/Urals as gas is marginal fuel

Domestic regulated tariff, set by the Federal Tariff Service

2006

2007

2008

2009

2010e

2011e

y Ultimate goal is to liberalize domestic sales and reach netback parity with European export price y The gap between domestic and export price is still significant – further increases necessary

Domestic gas price is set to grow to reach European netback parity Source: Federal Tariff Service, Ministry of Economic Development, Gazprom, E.ON estimates

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Russian power market Capacity market Key assumptions for the long-term capacity market “Old capacity” (built before 2007)

New capacity (built after 2007)

General principle

Capacity payment to cover fixed costs

Pricing mechanism

Capacity auctions within the free-flow capacity zones, marginal pricing

Capacity payment to cover fixed and capital costs, provide some ROI Based on 10-year capacity supply agreements and the following inputs: • Benchmark capex • Benchmark opex • 14-15% allowed rate of return • 15-year payback period assumption • Various adjustment coefficients • Capacity payment to cover 71-95% of total new build project costs

Restrictions

Price caps and price floors in regions with limited competition

Long-term capacity market rules ensure fixed cost of old plants are covered and provide certainty for new build investments Source: government decree No. 207 , Market Council. Capacity auctions for 2011 capacity supply are to be conducted until 1 Oct 2010, for 2012-2015 capacity supply – until 1 Jun 2011.

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Russian power market Summary

Fundamentals

• Recovering power consumption and economy driven by industrials • Non-reg. power prices exhibit strong recovery, set to rise further

Energy system

• Looming need for replacement of obsolete, inefficient generation • Fairly adequate reserve margins, tight in some regions

Regulatory framework

• Liberalization fully on schedule, 100% free wholesale from 2011 • Long-term capacity market rules enable above-WACC returns

Fuel markets

• Domestic gas price growth approved by the government • Longer-term goal to reach export netback parity

Main risks

• Pricing mechanism for relatively cost-intensive stations unclear • Possibility to introduce price caps, further regulatory interventions

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Agenda

Russian power market

E.ON’s power business in Russia

Key take-aways

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E.ON’s power business in Russia OGK-4 overview Existing asset portfolio Strategic merits Shaturskaya GRES Moscow region (machin., constr.)1 Gross capacity: 1,100 MW Avg. production: 4.4 TWh Avg. load factor: 47% Avg. sales: 5.1 TWh

Yajvinskaya GRES Perm region (metals, chemicals)1 Gross capacity: 600 MW Avg. production: 4.1 TWh Avg. load factor: 79% Avg. sales: 5.3 TWh

Surgutskaya GRES-2 Tyumen region (oil & gas)1 Gross capacity: 4,800 MW Avg. production: 34.4 TWh Avg. load factor: 82% Avg. sales: 35.3 TWh

Æ Two flagship power plants in

proximity to fuel sources Æ Exposure to industrialized and fast-growing regions Æ Operational focus on cost control and efficiency enhancements Key figures

Smolenskaya GRES Smolensk region (agrochem)1 Gross capacity: 630 MW Avg. production: 2.0 TWh Avg. load factor: 36% Avg. sales: 2.2 TWh

Berezovskaya GRES Krasnoyarsk region (metal/min.)1 Gross capacity: 1,500 MW Avg. production: 9.4 TWh Avg. load factor: 73% Avg. sales: 9.8 TWh

Note: avg. production, load factor, sales based on 2007-2009 figures.

y ~4% of Russia’s total capacity, sales amount to ~6% of consumption

FY2009

y Gross capacity, MW y Production, TWh y Electricity sales, TWh y y y y

8,630 53.9 57.3

Sales, € mln 973 Adj. EBITDA, € mln 203 73 Adj. EBIT2, € mln Capital employed, € mln 4,125

Robust and attractive portfolio dominated by low cost, efficient generation assets 1. Dominant power consumer segment in the respective region. 2. EBIT is affected by purchase price allocation effects.

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E.ON’s power business in Russia OGK-4 positioning OGK-4

… result in advantageous positioning on the merit order stack and higher load

322

OGK-1

80% 331

OGK-5

OGK-4

335

OGK-3

70%

342

OGK-2

347

OGK-6

366 290

300

310

320

330

340

350

360

370

Fuel cost/production, RUB/kWh

… and good access to fuel… OGK-4

Load factor, % (2009) Axis: OGKs avg. 56%

Heat rate, g/kWh (2009)

Superior efficiency…

OGK-2 OGK-1 60%

300

400

500 50%

OGK-5

600

700

422

OGK-1

497

OGK-2

40%

515

OGK-3

555

OGK-5

555

OGK-6

30% 663

0

200

400

600

800

OGK-6

OGK-3

Avg. fuel cost, RUB/kWh (2009) Axis: OGKs avg. 521 RUB/kWh

y Being highly efficient and having good access to primary fuel sources, Surgutskaya-2 and Berezovskaya power plants (73% of OGK-4’s installed capacity) have low variable costs and run as a base-load generation1 y This leads to substantially higher margins on the spot market as well as to higher sales volumes

OGK-4 is well geared to benefit from price increase due to higher margins on the spot market Source: company data, E.ON estimates. 1. Dispatch and load of Berezovskaya power plant substantially depends on hydrological balance in the region.

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E.ON’s power business in Russia Spreads in the non-regulated market Achieved non-reg. dark spreads, 2nd pricing zone

1200

1200

1000

1000

800

800 RUB/MWh

RUB/MWh

Achieved non-reg. spark spreads, 1st pricing zone

600

600

400

400

200

200 0

0 Jan-08

Jul-08

Jan-09

Day-ahead power, First zone (Europe/Urals)

Jul-09

Jan-10

Jul-10

Avg. achieved spark spread

Jan-08

Jul-08

Jan-09

Day-ahead power, Second zone (Siberia)

Jul-09

Jan-10

Jul-10

Avg. achieved dark spread

y Demand disruption in 2009 resulted in significant contraction of spark and dark spreads in the nonregulated segments of the wholesale market y Consumption pick-up and rising fuel costs led to expansion of the achieved spark and dark spreads, in particular of the most efficient power plants (Surgutskaya-2 and Berezovskaya) in 1H2010

Achieved spark and dark spreads to expand further on the back of rising demand, increasing fuel cost of a marginal power plant and better efficiency of E.ON’s two largest power stations Note: spark and dark spreads are based on electricity market only (exclude capacity)

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E.ON’s power business in Russia New build programme Rationale

Overview y ~2.4 GW additional capacity y ~€2.3 bn capex, thereof €1.3 bn pre-financed y FX risks for €/$ denominated contracts hedged

1 2 3 4

Name

Type

Shaturskaya Yaivinskaya Surgutskaya Berezovskaya

CCGT CCGT CCGT Coal

Capacity (MW) 400 400 800 800

Start-up date On-line 2011 2011 2014

Capacity construction commitment stipulated by OGK-4 acquisition conditions in 2007 Æ Favorable location of new builds in fast-growing regions Æ CCGTs far more efficient (55%+ efficiency) vis-a-vis existing conventional power plants (29-35%) Æ

Capital expenditures (less VAT), RUB bn 40 60

~56

30

RUB ~1001 bn in total 2007-2014

20 10 0 2007

2008

2009

2010-2014e

Investment programme to lift installed capacity by 30% 1. Equivalent of € 2.3 bn

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E.ON’s power business in Russia Performance improvement and mid-term targets

2009 vs 2008

2010 vs 2009

y Power price increase y Liberalization effect - Demand pick up and - Higher volumes sold gas price increase at free prices with premium to regulated y Liberalization effect - Higher volumes sold y Cost control measures at free prices - Procurement, overhead costs, y Expansion of spreads maintenance - Demand pick up and power price increase

2011 vs 2010

Result

y Power price increase - Gas price up, demand expected to grow

ÆAdjusted EBITDA to reach

y Liberalization effect - 100% liberalization of the wholesale market

Æ EBITDA margin to firm at

y Expansion of spreads - Gas price up, demand expected to grow

built capacities online

y Continuous cost control y New CCGTs 1,200 MW and optimization y Capacity sales under new rules y New 400MW CCGT in Q4

mid- to high triple digit € mln in 2011 above 20% level Æ Value-accretive newly Æ Low cost base, agile

management structure Mid-term target: €0.8-1.0bn adjusted EBITDA in 2013

Improving market fundamentals and management action enhance operational performance 17

Agenda

Russian power market

E.ON’s power business in Russia

Key take-aways

18

E.ON in the Russian power market Key take-aways External environment

Market framework

• Wholesale electricity market fully liberalized from 2011 onwards • Rules of the long term capacity market approved

Fundamentals

• Consumption driven by industrial demand; expected to grow • Power prices/spreads on the rise driven by soaring fuel, demand

Company’s perspective

Qualitative asset base

• Efficient gas/coal stations located in proximity to fuel sources • Value-accretive investment programme to enhance results

Management action

• Controllable cost base significantly down; leaner management • Operational improvements and fuel cost management

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E.ON Investor Relations Contact Sascha Bibert Head of IR

Peter Blankenhorn Manager

François Poullet Manager

Marc Koebernick Manager

Stephan Schönefuß Manager

Aleksandr Aksenov Manager

Carmen Schneider Manager

Sabine Palm Executive Assistant

T +49 2 11-45 79-5 42 [email protected]

T +49 2 11-45 79-4 81 [email protected]

T +49 2 11-45 79-3 32 [email protected]

T +49 2 11-45 79-2 39 [email protected]

+49 211 4579-4808 [email protected]

T +49 2 11-45 79-5 54 [email protected]

T +49 2 11-45 79-3 45 [email protected]

T +49 2 11-45 79-5 49 [email protected]

We are at your disposal!

This presentation may contain forward-looking statements based on current assumptions and forecasts made by E.ON Group management and other information currently available to E.ON. Various known and unknown risks, uncertainties and other factors could lead to material differences between the actual future results, financial situation, development or performance of the company and the estimates given here. E.ON AG does not intend, and does not assume any liability whatsoever, to update these forward-looking statements or to conform them to future events or developments.

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