A year after E.ON, Germany’s largest utility, announced a plan to carve up its operations, smaller rival RWE is set to follow suit.
Faced with losses in conventional electricity production due to Germany’s shift to renewable energy sources, RWE chief executive Peter Terium on Tuesday afternoon announced that Germany’s second-largest energy provider will spin off its renewable energy divisions into a new subsidiary. Handelsblatt reported the news from sources familiar with the company earlier Tuesday.
RWE’s non-executive supervisory board, which has to sign off on all key strategic decisions, is set to consider the move, which effectively divides up the Essen-based firm into two companies, at a meeting on December 11.
RWE shares rose nearly 17 percent after the news, reaching a three-week high of €12.70 in Frankfurt by the afternoon local time. The stock, however, has still lost about half of its value since the start of the year as investors have shunned German utility shares due to financial risks tied to Germany’s costly energy transition.
Mr. Terium, who initially resisted calls for the company to separate out its business, acknowledged mistakes may have been made in the past. A key reason for the announced overhaul is winning back confidence – and maybe getting a fresh cash injection from investors.
“We need money for growth. We’re not getting it at the moment,” he said Tuesday.
RWE’s plan takes the opposite approach to E.ON by splitting off its renewables into a new company and keeping conventional power within the existing RWE firm.
According to RWE’s plans, a new company will be created – with the working name “Newco” – that includes 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, would be kept in the current RWE.
In terms of numbers, the new firm will form the lion-share of RWE’s business with about €40 billion in revenues, 40,000 employees and operating profits of about €4 billion. It will also manage relations with RWE’s 23 million customers.
Mr. Terium rejected the suggestion that he was splitting up RWE, instead calling it “one enterprise… with two companies capable of a future.” RWE, he noted, would still hold a majority of the new “green” firm.
But it’s clearly a dramatic shift. At least 10 percent of the new firm will be sold to investors in a public offering by way of a capital increase at the end of 2016. RWE might also sell some of its own shares in the new company to strategic investors or financial firms, though no more than 49 percent. According to Handelsblatt sources, RWE is already in talks to sell some of its stake to Australian investment firm Macquarie.
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. The decision was taken by the German chancellor, Angela Merkel, in reaction to the Fukushima nuclear accident in Japan.
Since then, Germany has offered billions of euros in subsidies to makers of wind turbines and solar energy firms to expand the nation’s renewable energy grid. The subsidies have led to a glut of electricity on the market, which has cut wholesale electricity prices in half and led to billions of euros of losses at E.ON, RWE and rivals such as Vattenfall from Sweden and Karlsruhe-based EnBW. Some utilities have closed down brand new coal power plants.
The forced phase-out of German nuclear power plants has also decreased the value of these operations, creating additional losses at RWE, E.ON and rivals. There are also concerns over whether the roughly €40 billion, or $42.4 billion, set aside by the companies to dismantle and clean up nuclear power plants will cover the costs.
For RWE, the painful shift towards renewables has left the company struggling to convince investors it has what it takes to be a viable firm. Thomas Deser, a fund manager with Union Investment, said the new structure should help the company raise much-needed fresh capital on the market.
“This is a positive signal from RWE and Mr. Terium to the capital markets, policymakers and ratings agencies. The message is: ‘We have a plan, access to liquidity and fresh means to invest in growth,'” Mr. Deser told Handelsblatt Global Edition.
Given RWE’s financing needs, Mr. Deser said he expected the 10 percent IPO planned for the new company to be a “minimum” and held out the possibility that the company would need additional cash.
With RWE’s shares rising in conjunction with Tuesday’s announcement, RWE might consider taking advantage by launching a separate capital increase in the coming weeks or months – well before the IPO itself – according to Egmond Haidt, an analyst with Feingold Research, based in Würzburg near Frankfurt.
RWE had debts of some €25.8 billion at the end September. Its operating profit fell 9 percent over the first nine months of 2015 to €2.6 billion, and its net income – excluding some one-off items – fell nearly 29 percent to €545 million.
The decision by RWE comes one year after rival E.ON launched a similar move under chief executive Johannes Teyssen. Mr. Terium until now had publicly rejected a similar split for RWE, although as early as August Handelsblatt reported that RWE was simplifying its structures and that splitting up the firm was an option Mr. Terium was considering.
RWE is taking a different approach to E.ON, by spinning off its renewables into a new company and keeping conventional power within the existing RWE firm.
This is different from E.ON’s initial plan to spin off its nuclear and conventional power operations into a new company and keep renewables, its distribution network and customer service operations within E.ON.
It is a significant distinction. With its move, RWE is sidestepping a potential problem which E.ON originally faced: a planned law that will make companies liable for winding down their nuclear operations, even if they have divested them.
That law forced E.ON into a u-turn in September on its decision to split off its nuclear operations from renewable energy operations. E.ON’s new spin-off, Uniper, will now only include other conventional power plants such as coal, gas and oil exploration ventures, but nuclear power will be kept within E.ON.
With the German government also eager for a viable solution to the shift away from nuclear – and one that doesn’t kill off the country’s important utility firms – Mr. Deser of Union Investment said RWE’s proposal to keep conventional and nuclear power plants within the company may offer a way forward.
“There could be a solution here in the making, when it comes to the costs of a nuclear exit,” Mr. Deser said.
But whether Berlin agrees with that analysis remains to be seen. Sylvia Kotting-Uhl, energy spokesperson for the Green Party, said there was a danger that RWE was trying to limit its responsibility for winding down nuclear power by saddling its own unprofitable RWE brand with the task and moving on successfully with the new company, without any liabilities.
Mr. Terium denied such suggestions. RWE was “anything other than a bad bank,” he said.
But Mr. Terium will also have to convince the company’s own supervisory board and shareholders that breaking up the company is the right move. Cities and communities in Germany’s western Ruhrgebiet – where much of the company’s operations are based – own about one quarter of RWE shares.
Some communities worry they might lose influence as the majority of the RWE’s operations are moved into a new firm: “RWE is essentially being broken up,” worried one influential community representative, who declined to be named. “The lucrative areas are being sold off.”
RWE should enjoy the positive attention while it lasts. Mr. Haidt of Feingold Research noted that E.ON also enjoyed a bounce in its share price following last year’s announcement, but has since fallen back again. The company split “distracts” from RWE’s difficult financial situation, he added. Whether it will help in the long term remains to be seen.
Jürgen Flauger covers the energy markets for Handelsblatt, including electricity and gas providers, international market developments and energy policy. Christopher Cermak and Gilbert Kreijger are editors for Handelsblatt Global Edition in Berlin. To contact the authors: email@example.com, firstname.lastname@example.org and email@example.com.
This story was updated with additional comments from Mr. Terium and others at 18:30 Central European Time Tuesday.