Promising Transition

For RWE shareholders, patience could be rewarded

RWE, shareholders, German, power
Bright skies have been a rarity for German power providers. Source: AP Photo/Michael Probst

If you’re a long-term shareholder in a German utility, you deserve a pat on the back. Thanks to the country’s vaunted energy transition, conventional power producers have been through a rough decade. RWE, one of two main providers, has seen its share price plummet from a high of more than €100 ($122) in 2008 to a low of €9.20 in 2015.

This year, you will finally be rewarded for that patience. After two years of no dividends, RWE is paying its shareholders rather handsomely. Not only will they get 50 cents per share for 2017, but the company is paying a “special dividend” of €1 per share. That will cost RWE nearly €1 billion. Call it a sort of apology for the rough goings these past few years.

But the payout could also be seen as a sort of bribe to keep investors – and local communities – on RWE’s side: 2018 looks once again to be a rougher year for the company.

After a decade of painful transition, RWE’s future doesn’t look so bleak.

For once, RWE can afford to be generous. The utility posted net earnings of €1.9 billion last year after losing a record €5.7 billion just one year earlier (mostly due to one-off write-downs in the value of conventional power plants). Though RWE’s operating business has been decent, most of those 2017 profits – €1.7 billion to be exact – actually came from the German government, which was ordered by a court in June to pay back nuclear-fuel taxes that it illegally collected from utilities between 2011 and 2016.

Shareholders are now getting to share in the spoils of that court ruling, though the taxpayer should be mollified by the fact that about 20 percent of the shares are owned by local communities. RWE is sweetening the deal for new investors, too, promising that dividends will increase again to 70 cents per share this year. That promise comes despite a tough year in store.

25 p23 P&L Check RWE 2-01

Concerns for 2018 have much to do with the past. Electricity prices in Germany hit rock-bottom around two years ago as new renewable energy providers produced a glut of energy, but because providers like RWE deal in longer-term contracts, the company’s bottom line will take the biggest hit this year. Prices back then fell as low as €20 megawatt hours, compared to well over €50 before the 2011 Fukushima nuclear disaster.  As a result, profits could be half of what they were in 2017.

Currently electricity prices are back up around €38 as older conventional power sources have steadily been taken off line. In other words, after a decade of painful transition, RWE’s future doesn’t look so bleak. But before that, 2018 will require another round of patience from shareholders, and not just because of energy prices. The company is completely overhauling its entire business model for the second time in three years.

In 2016, RWE spun off most of its most promising divisions – renewables, grid operations and energy services – into a new subsidiary called Innogy. The parent, RWE, was left only with the worst bits of conventional power. E.ON, German’s second major provider, did a similar remove in reverse, keeping the best bits for itself and spinning conventional power generation into a subsidiary called Uniper.

If those moves weren’t stunning enough, the two companies surprised shareholders with another massive shift earlier this year. They agreed on a landmark deal to swap major assets. Innogy will be broken up, its network and services divisions sold to E.ON, which in turn will hand over its solar and wind power operations to RWE.

25 p23 P&L Check RWE 3-01

In short, RWE is turning itself into a pure energy producer – both of conventional and renewable sources – and eschewing the running of grid networks that are the second stage in the process. By adding wind and solar again, the deal also allows RWE to shake the image that it’s a backward producer of unsafe nuclear (which Germany is phasing out), dirty brown coal (which environmental lobbies want Germany to phase out) and natural gas.

It’s a big gamble, especially since Innogy was the only thing keeping RWE afloat this time last year. Rolf Martin Schmitz, RWE’s chief executive, is convinced that the move will turn his company into one of the most stable electricity providers in Europe. It helps that he’ll still have conventional energy sources under his roof, despite their reputation. Wind and solar provided 37 percent of Germany’s electricity last year, and while conventional power is slowly coming off line, other sources still have to pick up the slack in winter months when industrial production is high and sunny days are low. Gas-powered plants in particular can easily ramp production up or down as needs allow.

It’s a gamble that could also save Germany’s role in European power. Before the E.ON-RWE deal, speculation was rife that Europe’s energy providers needed to be consolidated. The speculation was that a foreign provider – Engie in France, Iberdrola in Spain or Enel in Italy – might snap up Innogy’s operations themselves (in a similar vein, E.ON’s subsidiary Uniper has been sold to a Finnish provider). Few expected RWE and E.ON themselves to step into the void.

Jürgen Flauger is Handelsblatt’s chief energy correspondent and is based in Düsseldorf. Christopher Cermak adapted this story into English for Handelsblatt Global. To contact the author: flauger@handelsblatt.com and cermak@handelsblatt.com

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