utility divides

RWE Expects Go-Ahead for Split

Martin Schroeder RWE
For RWE, the times are changing.
  • Why it matters

    Why it matters

    German power group RWE looks set to receive supervisory board backing for its plan to split itself to help cover the cost of nuclear plant closures.

  • Facts

    Facts

    • RWE’s municipal owners who hold 25 percent of its stock have criticized the planned move to divide the country’s second-largest power group in two.
    • The owners are worried that the split will dilute their shareholdings and lessen their control of the group. But they don’t have the power to thwart the move, and none of them will vote against it on Friday.
    • RWE’s move comes in response to Germany’s energy transition, in which nuclear power will be phased out by 2022 as the company shifts to renewables.
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  • Audio

    Audio

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It was never going to be the most pleasant of meetings and Peter Terium, the chief executive of power group RWE, opted to let his deputy Rolf Martin Schmitz represent him.

On Tuesday the representatives of the most important municipal shareholders, which together hold a quarter of RWE’s capital, visited the company’s headquarters in the western city of Essen to hear more about its planned reorganization.

The discussion between Mr. Schmitz and the supervisory board members, mayors and district authority chiefs was heated, people at the meeting reported.

But despite all their criticism, the municipal shareholders won’t block the planned split, announced last week when Germany’s second-largest utility said it would pool its power and gas grids, retail unit and renewable activities into a new entity.

Under the government’s Energiewende, or energy transition program, Germany in 2011 announced plans to phase out nuclear energy by 2022 and draw at least 80 percent of energy from renewables by 2050. For RWE and other utilities, this means a huge fall in the value of their traditional power generation holdings as the government supports renewables with subsidies.

All the country’s utilities are hurriedly restructuring in order to limit their losses as the government seeks to force them to meet the costs of unwinding and disposing of traditional plants.

According to an analysis by Société Générale, the new company will have an equity value of €38.1 billion, or $41.8 billion. The assets remaining at the old RWE AG will only be worth €6 billion.

RWE said last week it plans to divide itself up into two companies, one for renewable energy and one for conventional and nuclear power, to cope with the country’s costly move to cleaner energy sources. The move comes one year after rival E.ON launched a similar step.

The plan is expected to be approved by RWE’s supervisory board, the non-executive board in German companies that hires and fires chief executives and confirms strategic decisions.

“We have major misgivings regarding our own position but we support the plans in principle,” said one influential municipal official. “It’s high time RWE did something to bring itself forward.”

He added that in any case, the four municipal representatives on RWE’s supervisory board wouldn’t be able to block the plan at Friday’s supervisory board meeting even if they wanted to.

The trade unions IG BCE and Ver.di have already signaled that they’ll go along with the split, so Mr. Terium is on course to get majority backing from the board even if the municipal shareholders vote against it. One or two are still considering abstaining but it looks like none of them will vote No.

Restructuring at RWE-01

Mr. Terium was forced to announce the plans last Tuesday after Handelsblatt and other media had broken the news of the spectacular shift in strategy.

RWE plans to set up a new company – with the working name “Newco” – to include the renewable energies divisions as well as its distribution grid network and retail division.

Conventional power plants, including nuclear, coal and gas-fired electricity stations, are to be kept in the current RWE which will focus on the modernization of conventional plants and on organizing the phaseout of nuclear power.

RWE will control the new company but plans to sell up to 49 percent of its shares. That’s what the municipalities are worried about. They’re concerned about an erosion of their influence and their assets as parts of the renewables company, crucial to RWE’s future, will be sold off to outside investors.

Newco will account for the lion’s share of RWE’s business, comprising some four-fifths of group revenues and two-thirds of the workforce, as well as most of the company’s assets.

According to an analysis by Société Générale, the new company will have an equity value of €38.1 billion, or $41.8 billion. The assets remaining at the old RWE AG will only be worth €6 billion.

The decisive issue will be how the liabilities are divided up, said sources close to the company. The reserves set aside for the nuclear exit and for its coal mining activities will remain at RWE AG and the pension provisions will be divided up in line with the respective workforces. But there’s a lot of room for maneuver regarding the apportioning of financial liabilities, the sources said.

The municipal representatives are worried that RWE AG will turn into a kind of bad bank. They will indirectly hold shares in the new green company but through the step-by-step sales of shares in that company their stake will become increasingly diluted.

They’re also worried that they’ll lose control of the most important part of RWE’s business. At Tuesday’s meeting, they demanded seats in the supervisory board of Newco, participants reported.

The municipalities are also keeping a close eye on the role Mr. Terium will play in future. He had initially toyed with the idea of running just the new company but he now plans to control both firms, said sources close to the company: RWE AG as chief executive and the new company as supervisory board chairman.

The municipalities issued a brief statement last week saying they couldn’t “fundamentally evaluate” the plans because they didn’t have all the facts. They said they would provide an assessment on Friday afternoon, after the supervisory board meeting.

By that time, though, the decision will have been taken, despite their misgivings.

 

Jürgen Flauger covers the energy market for Handelsblatt, including electricity and gas providers, international market developments and energy policy. To contact the author: flauger@handelsblatt.com

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