RWE and Eon find fortunes diverge

Hiving off ‘dirty’ gas and coal-fired power stations seems to have been a mistake
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Three months ago, investors wanting exposure to Germany’s utilities had a choice of two leading companies. Now, after one of the biggest restructurings the German power industry has seen, they have four.

Both RWE and Eon have divided themselves in two, creating respectively the entities Innogy and Uniper, which listed within less than a month of each other on the Frankfurt stock exchange.

Suddenly, an industry that seemed to be in perpetual crisis has something to brag about. Shares in Innogy and Uniper have risen since their flotations.

For Stephan Lehrke, senior partner at Boston Consulting Group, the utilities “are now looking to the future” and can start thinking about growth options, as well as even mergers and acquisitions. “The risks are still there but they’re manageable now,” he says.

The restructuring has radically redrawn the German energy landscape by splitting it into two parts — ostensibly a “clean” one and a “dirty” one. RWE and Uniper have the old gas and coal-fired power stations that symbolise Germany’s fossil fuel past, while Eon and Innogy hold the clean, green businesses such as infrastructure and renewables. The original companies, Eon and RWE, are still operating the nuclear assets and are liable for any bills and future clean-up costs.

“We’re allowing investors the option to position themselves in one or the other risk class,” Johannes Teyssen, chief executive of Eon, said in an interview earlier this year.

The Innogy and Uniper listings come after a long period when their parent companies were seen as near-hopeless basket cases, as they staggered like wounded giants from the impact of Germany’s revolutionary embrace of renewables — the so-called Energiewende, “energy turning point”.

RWE and Eon found the power generated from their coal and gas-fired plants squeezed out of the market by heavily subsidised wind and solar energy.

The companies were also affected by a decline in the wholesale price of electricity and Germany’s decision, in the wake of the 2011 Fukushima disaster in Japan, to close all its nuclear power stations by 2022.

They face another hit. Last month the government confirmed an announcement that it made in April that Germany’s four nuclear energy companies — RWE and Eon along with Vattenfall and EnBW — should pay a combined €23.6bn into a state-controlled fund to cover the cost of storing Germany’s nuclear waste. This is €6.2bn more than the four had provisioned for.

The storage cost problem is make-or-break for RWE and Eon. Guido Hoymann, a utilities analyst at Bank Metzler, says the flotations of Innogy and Uniper pale into insignificance next to the nuclear issue. Reaching a mutually-acceptable solution on storage costs “is critical for the future of both companies”, he says, and “key to their survival”.

It is one of the reasons why, for Eon, the spin-off of Uniper has proved to be something of a false dawn. “Eon hoped that its shares would re-rate after the [Uniper] IPO,” says Roland Vetter, head of research at PraXis Partners, a utilities-focused investment fund. “But people have woken up to the fact that its balance sheet is stretched.”

The nuclear problem is one of the main factors in that.

Eon had more bad news last week when it announced a widening net loss of €9.3bn in the first nine months of the year, after booking an impairment charge of €6.1bn against Uniper. But Bernstein analyst Deepa Venkateswaran says the results were not all bad: Eon also announced that a potential capital raising to finance the additional cost of the nuclear clean-up would be capped at €1.3bn — analysts had expected it to be as high as €2bn — and said it had ruled out the option of a dilutive rights issue.

For RWE, on the other hand, the outlook has improved since Innogy’s flotation. The listing valued Innogy at €20bn, more than twice RWE’s current market capitalisation and five times more than the market value of Uniper. It raised €5bn, €2bn of which goes to Innogy and €3bn to RWE — a useful infusion of cash.

Meanwhile, RWE will retain 75 per cent of the new company. “Then, if it gets into financial trouble, or if it needs money to help it meet its nuclear liabilities, it can just sell more Innogy stakes,” says one industry consultant who follows the German utilities closely.

In the view of some analysts, RWE’s strategy of hiving off the green assets — rather than following the example of Eon and spinning off the conventional power stations — has proved to be the more sensible approach.

“RWE owns 75 per cent of something that is worth €20bn, while Eon owns 46 per cent of something that is worth €4bn,” says Mr Vetter.

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