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RWE could take over Innogy, E.ON renewables assets sooner than expected

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RWE could take over Innogy, E.ON renewables assets sooner than expected

German utility RWE AG is looking to take over the renewable assets of rival E.ON SE and subsidiary Innogy SE sooner than originally anticipated, and the three companies have accelerated the process around their planned €40 billion asset swap over the last few months.

The three companies originally said the closing of a voluntary public takeover offer to Innogy’s minority shareholders by E.ON was expected by mid-2019, with the transfer of the renewable assets to RWE to follow by the end of the year. But RWE CFO Markus Krebber suggested that the exchange could take place sooner during the company's first-half earnings call with analysts on Aug. 14.

"We will now set up a joint project organization to plan the integration process, which also implies that Innogy will start carving out the renewables. And we will also look into all potential measures to transfer the renewables business as fast as possible," Krebber said, adding, "What this means is that, probably, the time between [the closing of the PTO and the closing of the asset swap] can be shortened."

The deal, announced in March, would make RWE Europe's third-largest renewable energy provider by installed capacity after Spain's Iberdrola SA and Italy's Enel SpA, including 2,200 MW of offshore wind plants in operation globally and 2,800 MW and 3,000 MW of onshore wind capacity in Europe and the U.S., respectively, according to RWE. Under the terms of the deal, the remaining Innogy assets would go to E.ON, leaving the company focused on network and retail businesses.

Renewables would then account for 60% of RWE's EBITDA, while conventional power generation would still make up 20%, RWE CEO Rolf Martin Schmitz said during a results call with journalists. Since the company transferred its renewable, network and retail businesses to the newly created Innogy in 2016, RWE’s power generation business has been focused on coal, natural gas and nuclear.

Further investment in renewables

After the asset swap, RWE plans to invest approximately €1.5 billion annually for new projects in the renewables segment.

"It’s too early to say exactly which markets, which technologies. We want to develop this carefully, discuss with the management of Innogy and E.ON. When that has happened, we will give a closer outlook for renewables and investment strategy," Krebber said.

Krebber also said that, while RWE could not interfere in Innogy’s business while they were still operating independently, the two companies had agreed that the subsidiary would approach RWE if it was seeking financing for projects that RWE would "probably want to keep" following Innogy's integration.

Gas and coal remain relevant

Conventional generation will remain a mainstay of the group, Schmitz said. RWE will keep looking for attractive investments in gas-fired generation and is currently participating in an asset tender for Germany’s grid stability reserve. Application documents for its Gundremmingen, Biblis and Karlstein-Dettingen power plants were submitted in early August.

The CEO also commented on Germany’s recently established "Commission on Growth, Structural Change and Employment" — known as the coal exit commission — which is tasked with naming an end date for coal-fired power production in the country by the end of 2018.

"Bearing in mind the complex interdependencies of the energy business and the economy, the commission is on a tight schedule — a schedule that is actually too tight, if you ask me," he said, emphasizing the need for speeding up grid expansion and renewables development to achieve Germany’s energy transition, rather than replacing coal with gas, which will eventually become obsolete as well.

Lower margins, production depress earnings

Using figures that excluded innogy's grid and retail businesses as discontinued operations, RWE reported adjusted net income of €683 million in the first half of the year, down 23% from €883 million in the same period in 2017. The standalone adjusted EBITDA stood at €1.14 billion, down by 21% from €1.44 billion in the first half of 2017.

The company’s reported results included the dividend from subsidiary Innogy, as well as RWE’s own lignite and nuclear, European power and supply and trading divisions.

The company said the drop in earnings was in line with expectations and largely due to reduced margins and lower power production, partly offset by a better result in the energy trading business. RWE also confirmed standalone net income outlook for the full year 2018 between €500 million and €800 million.