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Innogy says retail merger with SSE could fail, lowers renewable earnings outlook

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Innogy says retail merger with SSE could fail, lowers renewable earnings outlook

The merger of German utility Innogy SE's U.K. retail business with that of Scotland's SSE PLC could fall apart in light of regulatory changes and adverse market developments in the country, Innogy CFO Bernhard Günther told journalists Nov. 13.

Following the announcement that the deal was being renegotiated in light of the U.K.'s introduction of an energy price cap from the start of next year, Günther reaffirmed that both companies were still working on making the merger work. But the price cap, whose effect on the revenues of both existing retail companies will differ significantly, could also mean that there was a more attractive option than what had been agreed, he said.

"The negotiations are now continuing with SSE and we mostly, probably, believe that [the discussions] will lead to success," Günther said on a call to discuss its nine-month fiscal-year 2018 earnings. "But that does not exclude the possibility of failure."

Although he declined to provide details on any potential adjustment of the merger terms, the executive emphasized that the market environment had worsened and regulatory interventions like the price cap were a significant element to consider in assessing the potential viability of the proposed new retail entity.

The merger of SSE's retail business and Innogy subsidiary NPower was originally planned to close in the first quarter of 2019 after the U.K. competition authority gave its green light for the deal in October. But both companies announced Nov. 8 that the timeline would be pushed back as they consider whether to add direct or indirect financial contributions by each party.

Under the original terms of the deal, SSE shareholders would have held 65.6% of shares in the newly formed company, with Innogy retaining 34.4%.

U.K. energy regulator Ofgem earlier in November announced the final level of its price cap, which will limit what power and gas suppliers can charge customers on their most expensive default tariffs. The final level of the cap was set at £1,137 per year for a typical dual-fuel customer paying by direct debit, but the cap will hit some suppliers more than others. According to Ofgem, NPower customers stand to save £104 on average, while SSE's stand to see bill reductions of £55.

Lower renewable earnings outlook

Detailing Innogy's financial results for the third quarter of 2018 in a separate call with analysts, Günther also said that "extraordinarily bad" wind levels meant that Innogy expected the adjusted EBIT of the company's renewables segment to come in €50 million lower than previously forecast for the full financial year, at €300 million.

"The wind output in Q3 was significantly below the long-term average [and] the same applies to Q4 so far," the CFO said.

Due to weather effects and customer losses in the Netherlands, the company also reduced the outlook for adjusted core earnings from its retail business by €50 million to around €700 million. Since both downward revisions are expected to be compensated by a €100 million increase in the outlook for the grids and infrastructure business to €1.95 billion, the overall group's adjusted EBIT was left unchanged, Günther said.

Innogy's renewable power generation was up slightly from 6.2 TWh to 6.3 TWh in the first nine months of the year compared with last year's period, as new capacity came online. Innogy also more than doubled capital expenditure in the segment, from €246 million in 2017 to €521 million this year.

The company now has 200 MW of new wind capacity under construction for commissioning in 2018 and 2019, according to Günther, with a total pipeline of 9.3 GW of potential projects under development. Between 50% and 75% of the 1.1-GW pipeline for the next two years consists of solar projects, including the 349-MWp Limondale plant in Australia, he said.

Innogy currently owns just over 3.5 GW of renewable generation assets, the vast majority of them onshore and offshore wind parks. All of its renewable energy plants are slated to pass to Innogy's parent company RWE AG under an asset swap announced this year, which will see the rest of the business, including the Innogy brand, absorbed by rival E.ON SE.

E.ON, meanwhile, which is acquiring Innogy's network and retail assets, known as npower Ltd., said it may get rid of its future stake in the new retail company created by the SSE/Npower merger.

E.ON CFO Marc Spieker said on a call with journalists Nov. 14 that E.ON remained hopeful the deal between Innogy and SSE would pass, but added that it was not necessarily determined to keep the minority stake in the new company, which will compete with E.ON's own U.K. retail business.

"We expect that [both companies] will continue to see the advantages of a merger," Spieker said. "[But] we have no strategic interest to hold onto this financial stake in the long term."