Electric Utilities

Not for Widows and Orphans

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E.ON's CEO Johannes Teyssen finally has a lot to smile about. Source: Reuters

Utilities used to be the ideal stocks for widows and orphans, meaning very conservative investors. Low but steady growth, high dividend yield, never any worries – have to keep the lights on, after all.

Those days are gone, as the roller coaster ride for the stock of E.ON, one of Germany’s largest electrical utilities, has shown. After falling to a low of nearly €6 ($7.16) last November as the company spun off its legacy fossil fuel power assets, the stock has bounced back more than 50 percent to above €9.

Gone, too, are the days of 20-year capital spending plans and 30-year contracts for delivery of coal. E.ON wrote off billions when it spun off the fossil fuel plants into a subsidiary, Uniper, and its equity capital imploded to €1.3 billion from €19 billion as it booked a €16 billion loss for 2016. It became a stock not only for widows and orphans to avoid but anyone faint of heart.

What a difference a few months can make. In the first half of this year, E.ON roared back with a net profit of €4 billion, while rebuilding its depleted equity base to €6.2 billion. CEO Johannes Teyssen, whose position seemed fragile six months ago, is now being offered a three-year extension of his contract, currently set to expire next year, through 2021, Handelsblatt has learned.

His plan paid off, even though it took the company very nearly to the breaking point.

It is a gratifying turn of events for a chief executive who started his career 38 years ago at Veba, one of the companies merged to create E.ON in 2000, back in the day when utilities were indeed the investment of choice for widows and orphans. Then came Germany’s energy transition and exit from nuclear power in 2011, which forced a massive rethink for all of the country’s utilities.

Mr. Teyssen’s bold plan – one that has since been followed to varying degrees by rivals – made a sharp break with the past and pushed E.ON into the brave new energy world by focusing on renewable energy generation, distribution and customer services. His plan paid off, even though it took the company very nearly to the breaking point. Instead of plodding smokestacks, E.ON is now ready to take on the likes of Google in a digital world of distributed energy resources, smart grids, smart meters, smart devices and customers who manage their own consumption and often rates.

And smart managers. Chief Operating Officer Karsten Wildberger, recruited from the Australian telecoms firm Telstra without any background in power generation, is spearheading these efforts, such as the move into e-mobility, and could be a candidate to succeed Mr. Teyssen come the day. But Leonhard Birnbaum, who heads up the utility’s renewable energy and networks, will also be vying for the job.

Balance has now been restored.

The latest successes for Mr. Teyssen are quieting the unrest from his strategy of retaining the future-oriented business in the parent company and spinning off the legacy power generation. Rival utility RWE went in the opposite direction, spinning off a new and glamorous Innogy and leaving behind the tiresome fossil fuel business and its liabilities. As a result, Innogy skyrocketed as a stock market darling, while E.ON wrote off its billions and the power generation unit, Uniper, plunged in value.

Balance has now been restored, however. Not only has E.ON’s stock recovered but Uniper, too, has more than doubled in value. This week, the Finnish firm Fortum announced it was seeking to acquire Uniper. E.ON could collect €3.76 billion for the 47 percent of Uniper it still holds as Fortum has offered €22 a share. The news was welcome since Uniper was floated at a price just over €10, making E.ON’s stake worth only €1.6 billion.

An earlier windfall came in the form of a court case that E.ON and other German nuclear power operators won against the government, requiring Berlin to pay back a nuclear tax collected between 2011 and 2016. This brought another €3 billion into the company’s coffers.

Already in the half-year results, E.ON was able to report that the nuclear tax windfall and various costs savings enabled the company to reduce its debt to €21.5 billion from €26.2 billion at the end of 2016. A new study by Morgan Stanley calculates that the debt ratio – net debt compared to EBITDA (earnings before interest, taxes, depreciation and amortization) – should fall to 3.5. This is not only a big improvement on 5.3 at the end of 2016 but below E.ON’s target of 4.0.

The board will formally approve Mr. Teyssen’s contract extension early next year, once he is in the final year of the current contract. He will be 62 when the new term expires, and company sources say he plans to retire then. In the meantime, he can feel vindicated that his plan to radically transform the historic utility tracing its roots back to 1923 has set it on a course for the 21st century. In the meantime, his strategy is finally paying dividends – literally, as the company plans to boost its payout starting next year.

Jürgen Flauger covers electricity and gas providers, international market developments and energy policy for Handelsblatt. Darrell Delamaide adapted the article to English for Handelsblatt Global. To contact the author: flauger@handelsblatt.com.

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