Replacement of production capacities is a key
Check against delivery
2008 Financial Year
Replacement of production capacities is a key strategic challenge for BKW
Address by Kurt Rohrbach, President of the BKW FMB Energy Ltd Executive Board, to the Annual Press Conference on 19 March 2009
Ladies and Gentlemen
Welcome to the Annual Press Conference of BKW FMB Energy Ltd (BKW). Our management team today is slightly different compared to recent years. Since the beginning of this year, Beat Grossenbacher has been the new Chief Financial Officer at BKW. You all already know Hermann Ineichen, who is Head of the Energy Switzerland Division. I'd like to start with a few words on the BKW Group's results and the most important activities during the year under review. I will then discuss a few selected topics in more detail, following which Hermann Ineichen will comment on the energy business and specific projects, and Beat Grossenbacher will go over the financial aspects of the results.
Introduction Last year the entire electricity sector found itself in the spotlight even more than usual. On the one hand, the framework permit applications for a replacement for Switzerland's oldest nuclear power plants attracted much attention. From 2025, these replacement plants will help to close the emerging gap between electricity supply and demand in Switzerland. On the other hand, adjustments to electricity prices and the firs t phase of market liberalisation were the subject of much public and political debate, because the competition ushered in by the deregulated market was not accompanied by the expected low prices. Given the difficult economic situation, this realisation caused an additional furore.
2
Review of results In 2008 the BKW Group recorded a good operating result even while pursuing cautious trading strategies and honouring its commitments as a utility. The Group succeeded in growing consolidated operating revenue by almost a quarter to CHF 3,469 million, thanks to increased sales activities in Switzerland and neighbouring countries, particularly Italy. This growth was also achieved thanks to higher trading volumes: BKW succeeded in capitalising on the opportunities available on international markets.
BKW's main yardstick for performance is operating income, i.e. adjusted EBITDA. In 2008, EBITDA rose by 14 percent year-on-year to CHF 471 million. This improvement is chiefly a result of the positive performance recorded by the energy business. In the year under review, BKW capitalised on every opportunity despite a challenging environment marked by highly volatile energy prices.
As feared six months ago, profit for the year was impacted by the negative trend on financial markets and its effect on the state funds for decommissioning and disposal, with the result that net profit for the BKW Group closed the year 39 percent lower at CHF 139 million. According to the provisional results for 2008, the two state funds for decommissioning and disposal recorded a book loss of 21 percent. This loss is roughly commensurate with market developments and was unavoidable, despite the widely diversified investment strategy, since virtually all investment categories (equities, bonds, real estate, commodities etc.) were affected by the crisis. BKW reported the first part of this book loss in the 2008 half-year results, and communicated it at that time.
Electricity market liberalisation and electricity prices The first stage in the liberalisation of Switzerland's electricity market came into force on 1 January 2009. A system change of this magnitude does not come about automatically, and necessitated major adjustments and a realignment of key business processes. The change was preceded by cost-intensive preparations, thanks to which the technical transition for BKW was seamless.
3
The new Electricity Supply Act (StromVG) brings Switzerland more into line with its neighbouring countries, where the market has already been open for several years. While Switzerland's market had been opened prior to this on the basis of a decision by the Federal Court, the extensive lack of rules meant that only a few participants, sales partners or companies with high electricity consumption volumes were able to benefit. Naturally, it was they who were most affected when new prices were defined, because their old contracts had been signed a few years ago at a time when prices were low. Now they were obliged to accept price rises which in some cases were sizeable. Understandably, the fact that these price increases were accompanied by effects which were not related in any way to market liberalisation – namely the introduction of the feedin tariff and radical realignment of the reserve capacity which Switzerland is obliged to provide – is of no interest to the customers affected or to politicians. Given this situation, BKW's moderate price adjustment of 9.5 percent can certainly not be blamed for causing these harsh reactions. As a supporter of the liberalised electricity market, we were aware from the outset that the transition from the old regime to the new one had to be carefully planned. But careful planning also includes a sensible schedule.
As far back as a year ago we voiced concerns that, while the authorities allowed themselves sufficient time to formulate the ordinance, the objective was to implement it within four months. This remains a real concern, and history is threatening to repeat itself. The revised ordinance issued by the Federal Council envisages publishing the 2009 prices for all suppliers on 1 April. The prices for the extra-high voltage grid were announced on 9 March, in accordance with the decree by ElCom. I find it difficult to imagine how the entire industry will be able to calculate, assess and legally define new prices within the space of only three weeks. In this context, Hermann Ineichen will be discussing BKW's approach in more detail.
Another cause for concern is the fact that other ideas besides the changed ordinance have been put forward – as if it were possible to squeeze any more juice from the lemon. Such endeavours do not exactly make the situation any easier. After all, the issue at stake is not lemons but our energy security, which – and this is my own personal conviction – is under more threat than we like to think. In the interests of energy security,
4
rather than making further modifications to the law and ordinance, it would make more sense to acquire more experience, and only then – after careful consideration and deliberation – make any necessary adjustments.
The challenge of meeting demand There is now no question but that production capacities in Switzerland need to be replaced in the mid-term in order to meet the growing demand for electricity. As a power supplier, BKW views this challenge as a key priority. With this in mind, it is investing in projects to expand production as well as grids. Hermann Ineichen will discuss the most important projects in his presentation. BKW's long-term goal is to generate as much carbon-neutral electricity as possible. Such an ambitious goal cannot be achieved from one day to the next, and one of the essential criteria in this regard is the physical replacement of nuclear power obtained from Mühleberg and long-term contracts with France.
Even if the bid to replace these capacities fails, BKW must maintain its room for manoeuvre. Until the situation with regard to replacements for Switzerland's oldest nuclear power plants is clarified, as a supplier BKW cannot simply write off convent ional thermal electricity production and turn its back on it.
Wherever BKW opts for conventional thermal electricity production after carefully weighing up all the consequences, it will select only modern and efficient types of power plants in order to minimise carbon emissions.
This also applies in Germany where, in addition to the Wilhelmshaven power plant currently under construction, BKW is developing a coal-fired power plant project in Dörpen. A year ago we announced that we were seeking partners to reduce our participation. This step has now been taken, and BKW is handing over the project lead for Dörpen to an experienced industrial partner, Energie-Baden-Württemberg AG (EnBW). At the same time BKW is selling around 75 percent - a clear majority stake in the project – to EnBW. With this carefully considered realignment of the partnership, BKW is honouring its responsibility to the project, authorities and population in the Emsland district.
5
In addition to its strong commitment to new renewable energies in Switzerland, BKW has also decided to invest in such resources abroad. The focus is on cooperative ventures: The cooperation with EnBW has also created a good basis in this context. BKW has set itself the goal of acquiring substantial shares of around 1.5 Terawatt-hours per year in wind capacities abroad, which entails investments in the range of several hundred million Swiss francs. The move to expand its wind power portfolio is consolidating BKW's position in the foreign markets it serves. BKW has already authorised a credit of CHF 50 million for the development, planning and implementation of the first wind power projects in Germany.
Besides its eight hydroelectric power plants in Italy, which also produce renewable energy, BKW is also focusing on gas-fired electricity generation. This involvement reflects the country's energy mix. Almost half of the electricity produced in Italy comes from gas fired combined-cycle power plants, and since last September one of the most modern facilities of its type in the world, the gas-fired combined-cycle power plant in Livorno Ferraris, has been connected to the grid. BKW has a 25 percent stake in the 800Megawatt plant, which is principally owned by E.on Energie AG. Thanks to the new power plant, an old and inefficient power plant in the neighbourhood has virtually ceased generating electricity.
As mentioned before, in 2008 BKW expanded its leading position in the Swiss market for new renewable energies, doubling the volume of electricity produced from renewabl es to 28 Gigawatt-hours. In Switzerland, BKW is working on 200 projects via its subsidiary SolE Suisse AG. The aim is to produce 1 Terawatt-hour of electricity from wind, biomass, solar energy, small hydropower and thermal energy by 2025. Despite these efforts, however, the volume of new renewable energy produced will not be sufficient to cover the rising demand for electricity in Switzerland in the foreseeable future. Nor will it be enough to fully or even substantially compensate for the absence of nuclear energy capacities. To do this we must continue to rely on large-scale power plants. I have mentioned nuclear energy several times. As you know, last December BKW and Axpo submitted two framework permit applications to the responsible federal office. In all, the authorities have three projects under consideration since, besides Axpo and BKW, Atel has also submitted
6
a framework permit application. Two facilities will be required initially to replace the missing nuclear energy capacities. All three companies are aware of this fact, and negotiations among them are ongoing. I am confident that we will find a solution.
Only if voters approve a replacement for the facilities due to be taken off the grid, will Switzerland succeed in achieving a carbon-neutral electricity production mix over the longer term. But nuclear energy is not the only requirement. We also need to ensure the optimal use of hydropower. The Federal Council's energy strategy aims to increase domestic hydroelectricity production by 2000 Gigawatt-hours up to 2030, but a great many licences are due to expire in Switzerland over the next few years, and the new licences will most likely be contingent on generally higher volumes of residual water. This, coupled with political campaigns such as the "Living Water" initiative, will reduce electricity production and make it difficult to maintain even existing production volumes. BKW has seen this for itself through its stake in Kraftwerke Oberhasli AG (KWO). There is now a definitive need to change the licence for expansion of the Grimselsee. This is impeding a number of construction projects planned by KWO. As part of the KWOplus investment programme, around CHF 900 million has been earmarked for planned projects. These – and expansion of the Grimselsee in particular – will now be delayed until further notice.
Outlook Now for the financial outlook: Assuming a sustained strong market position, the BKW Group expects to end the 2009 financial year with revenue on a par with the previous year and stable development of the energy business. Nevertheless, lower energy prices on the international markets, economic uncertainty and the new regulatory requirements will impact the operating result. Taking all these factors into account, it is unlikely that the good 2008 results will be achieved at EBITDA level. The financial result is dependent on financial market movements. Assuming that equity markets at least stabilise at a low level, BKW expects to close 2009 with higher net profit than in 2008.
7
Concluding remarks I mentioned the KWOplus investment programme a moment ago. A great many other projects besides this one are blocked, involving traditional electricity production, new renewable energies and line projects. These are all projects which generate econom ic benefits and are necessary for electricity supplies in our country. In some cases the credits have already been granted. For myself, I find it frustrating when such projects which have the potential to create high added value in Switzerland are put on ice. It bothers me even more right now, when governments are being forced to draw up and finance economic stimulus packages. Perhaps a somewhat broader-based debate is needed
on
the
relationship
and
reciprocities
between
energy
supplies
and
macroeconomics. BKW would welcome such a dialogue – as would the entire industry.
2008 Financial Year
Replacement of production capacities is a key strategic challenge for BKW
Address by Kurt Rohrbach, President of the BKW FMB Energy Ltd Executive Board, to the Annual Press Conference on 19 March 2009
Ladies and Gentlemen
Welcome to the Annual Press Conference of BKW FMB Energy Ltd (BKW). Our management team today is slightly different compared to recent years. Since the beginning of this year, Beat Grossenbacher has been the new Chief Financial Officer at BKW. You all already know Hermann Ineichen, who is Head of the Energy Switzerland Division. I'd like to start with a few words on the BKW Group's results and the most important activities during the year under review. I will then discuss a few selected topics in more detail, following which Hermann Ineichen will comment on the energy business and specific projects, and Beat Grossenbacher will go over the financial aspects of the results.
Introduction Last year the entire electricity sector found itself in the spotlight even more than usual. On the one hand, the framework permit applications for a replacement for Switzerland's oldest nuclear power plants attracted much attention. From 2025, these replacement plants will help to close the emerging gap between electricity supply and demand in Switzerland. On the other hand, adjustments to electricity prices and the firs t phase of market liberalisation were the subject of much public and political debate, because the competition ushered in by the deregulated market was not accompanied by the expected low prices. Given the difficult economic situation, this realisation caused an additional furore.
2
Review of results In 2008 the BKW Group recorded a good operating result even while pursuing cautious trading strategies and honouring its commitments as a utility. The Group succeeded in growing consolidated operating revenue by almost a quarter to CHF 3,469 million, thanks to increased sales activities in Switzerland and neighbouring countries, particularly Italy. This growth was also achieved thanks to higher trading volumes: BKW succeeded in capitalising on the opportunities available on international markets.
BKW's main yardstick for performance is operating income, i.e. adjusted EBITDA. In 2008, EBITDA rose by 14 percent year-on-year to CHF 471 million. This improvement is chiefly a result of the positive performance recorded by the energy business. In the year under review, BKW capitalised on every opportunity despite a challenging environment marked by highly volatile energy prices.
As feared six months ago, profit for the year was impacted by the negative trend on financial markets and its effect on the state funds for decommissioning and disposal, with the result that net profit for the BKW Group closed the year 39 percent lower at CHF 139 million. According to the provisional results for 2008, the two state funds for decommissioning and disposal recorded a book loss of 21 percent. This loss is roughly commensurate with market developments and was unavoidable, despite the widely diversified investment strategy, since virtually all investment categories (equities, bonds, real estate, commodities etc.) were affected by the crisis. BKW reported the first part of this book loss in the 2008 half-year results, and communicated it at that time.
Electricity market liberalisation and electricity prices The first stage in the liberalisation of Switzerland's electricity market came into force on 1 January 2009. A system change of this magnitude does not come about automatically, and necessitated major adjustments and a realignment of key business processes. The change was preceded by cost-intensive preparations, thanks to which the technical transition for BKW was seamless.
3
The new Electricity Supply Act (StromVG) brings Switzerland more into line with its neighbouring countries, where the market has already been open for several years. While Switzerland's market had been opened prior to this on the basis of a decision by the Federal Court, the extensive lack of rules meant that only a few participants, sales partners or companies with high electricity consumption volumes were able to benefit. Naturally, it was they who were most affected when new prices were defined, because their old contracts had been signed a few years ago at a time when prices were low. Now they were obliged to accept price rises which in some cases were sizeable. Understandably, the fact that these price increases were accompanied by effects which were not related in any way to market liberalisation – namely the introduction of the feedin tariff and radical realignment of the reserve capacity which Switzerland is obliged to provide – is of no interest to the customers affected or to politicians. Given this situation, BKW's moderate price adjustment of 9.5 percent can certainly not be blamed for causing these harsh reactions. As a supporter of the liberalised electricity market, we were aware from the outset that the transition from the old regime to the new one had to be carefully planned. But careful planning also includes a sensible schedule.
As far back as a year ago we voiced concerns that, while the authorities allowed themselves sufficient time to formulate the ordinance, the objective was to implement it within four months. This remains a real concern, and history is threatening to repeat itself. The revised ordinance issued by the Federal Council envisages publishing the 2009 prices for all suppliers on 1 April. The prices for the extra-high voltage grid were announced on 9 March, in accordance with the decree by ElCom. I find it difficult to imagine how the entire industry will be able to calculate, assess and legally define new prices within the space of only three weeks. In this context, Hermann Ineichen will be discussing BKW's approach in more detail.
Another cause for concern is the fact that other ideas besides the changed ordinance have been put forward – as if it were possible to squeeze any more juice from the lemon. Such endeavours do not exactly make the situation any easier. After all, the issue at stake is not lemons but our energy security, which – and this is my own personal conviction – is under more threat than we like to think. In the interests of energy security,
4
rather than making further modifications to the law and ordinance, it would make more sense to acquire more experience, and only then – after careful consideration and deliberation – make any necessary adjustments.
The challenge of meeting demand There is now no question but that production capacities in Switzerland need to be replaced in the mid-term in order to meet the growing demand for electricity. As a power supplier, BKW views this challenge as a key priority. With this in mind, it is investing in projects to expand production as well as grids. Hermann Ineichen will discuss the most important projects in his presentation. BKW's long-term goal is to generate as much carbon-neutral electricity as possible. Such an ambitious goal cannot be achieved from one day to the next, and one of the essential criteria in this regard is the physical replacement of nuclear power obtained from Mühleberg and long-term contracts with France.
Even if the bid to replace these capacities fails, BKW must maintain its room for manoeuvre. Until the situation with regard to replacements for Switzerland's oldest nuclear power plants is clarified, as a supplier BKW cannot simply write off convent ional thermal electricity production and turn its back on it.
Wherever BKW opts for conventional thermal electricity production after carefully weighing up all the consequences, it will select only modern and efficient types of power plants in order to minimise carbon emissions.
This also applies in Germany where, in addition to the Wilhelmshaven power plant currently under construction, BKW is developing a coal-fired power plant project in Dörpen. A year ago we announced that we were seeking partners to reduce our participation. This step has now been taken, and BKW is handing over the project lead for Dörpen to an experienced industrial partner, Energie-Baden-Württemberg AG (EnBW). At the same time BKW is selling around 75 percent - a clear majority stake in the project – to EnBW. With this carefully considered realignment of the partnership, BKW is honouring its responsibility to the project, authorities and population in the Emsland district.
5
In addition to its strong commitment to new renewable energies in Switzerland, BKW has also decided to invest in such resources abroad. The focus is on cooperative ventures: The cooperation with EnBW has also created a good basis in this context. BKW has set itself the goal of acquiring substantial shares of around 1.5 Terawatt-hours per year in wind capacities abroad, which entails investments in the range of several hundred million Swiss francs. The move to expand its wind power portfolio is consolidating BKW's position in the foreign markets it serves. BKW has already authorised a credit of CHF 50 million for the development, planning and implementation of the first wind power projects in Germany.
Besides its eight hydroelectric power plants in Italy, which also produce renewable energy, BKW is also focusing on gas-fired electricity generation. This involvement reflects the country's energy mix. Almost half of the electricity produced in Italy comes from gas fired combined-cycle power plants, and since last September one of the most modern facilities of its type in the world, the gas-fired combined-cycle power plant in Livorno Ferraris, has been connected to the grid. BKW has a 25 percent stake in the 800Megawatt plant, which is principally owned by E.on Energie AG. Thanks to the new power plant, an old and inefficient power plant in the neighbourhood has virtually ceased generating electricity.
As mentioned before, in 2008 BKW expanded its leading position in the Swiss market for new renewable energies, doubling the volume of electricity produced from renewabl es to 28 Gigawatt-hours. In Switzerland, BKW is working on 200 projects via its subsidiary SolE Suisse AG. The aim is to produce 1 Terawatt-hour of electricity from wind, biomass, solar energy, small hydropower and thermal energy by 2025. Despite these efforts, however, the volume of new renewable energy produced will not be sufficient to cover the rising demand for electricity in Switzerland in the foreseeable future. Nor will it be enough to fully or even substantially compensate for the absence of nuclear energy capacities. To do this we must continue to rely on large-scale power plants. I have mentioned nuclear energy several times. As you know, last December BKW and Axpo submitted two framework permit applications to the responsible federal office. In all, the authorities have three projects under consideration since, besides Axpo and BKW, Atel has also submitted
6
a framework permit application. Two facilities will be required initially to replace the missing nuclear energy capacities. All three companies are aware of this fact, and negotiations among them are ongoing. I am confident that we will find a solution.
Only if voters approve a replacement for the facilities due to be taken off the grid, will Switzerland succeed in achieving a carbon-neutral electricity production mix over the longer term. But nuclear energy is not the only requirement. We also need to ensure the optimal use of hydropower. The Federal Council's energy strategy aims to increase domestic hydroelectricity production by 2000 Gigawatt-hours up to 2030, but a great many licences are due to expire in Switzerland over the next few years, and the new licences will most likely be contingent on generally higher volumes of residual water. This, coupled with political campaigns such as the "Living Water" initiative, will reduce electricity production and make it difficult to maintain even existing production volumes. BKW has seen this for itself through its stake in Kraftwerke Oberhasli AG (KWO). There is now a definitive need to change the licence for expansion of the Grimselsee. This is impeding a number of construction projects planned by KWO. As part of the KWOplus investment programme, around CHF 900 million has been earmarked for planned projects. These – and expansion of the Grimselsee in particular – will now be delayed until further notice.
Outlook Now for the financial outlook: Assuming a sustained strong market position, the BKW Group expects to end the 2009 financial year with revenue on a par with the previous year and stable development of the energy business. Nevertheless, lower energy prices on the international markets, economic uncertainty and the new regulatory requirements will impact the operating result. Taking all these factors into account, it is unlikely that the good 2008 results will be achieved at EBITDA level. The financial result is dependent on financial market movements. Assuming that equity markets at least stabilise at a low level, BKW expects to close 2009 with higher net profit than in 2008.
7
Concluding remarks I mentioned the KWOplus investment programme a moment ago. A great many other projects besides this one are blocked, involving traditional electricity production, new renewable energies and line projects. These are all projects which generate econom ic benefits and are necessary for electricity supplies in our country. In some cases the credits have already been granted. For myself, I find it frustrating when such projects which have the potential to create high added value in Switzerland are put on ice. It bothers me even more right now, when governments are being forced to draw up and finance economic stimulus packages. Perhaps a somewhat broader-based debate is needed
on
the
relationship
and
reciprocities
between
energy
supplies
and
macroeconomics. BKW would welcome such a dialogue – as would the entire industry.
