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RWE proposes higher dividend after dip in 2018 financial results

German utility RWE AG is proposing to increase its dividend further despite forecasting a drop in earnings for 2019 amid headwinds in the German and U.K. markets.

The company said March 14 that it planned to lift its shareholder payout to 80 euro cents per share for the current year, up from 70 euro cents per share in 2018 and 50 euro cents per share in 2017, despite seeing profits drop last year and predicting a challenging market environment in 2019 as well.

RWE's adjusted net income declined to €591 million for 2018 from €973 million the previous year, largely because of lower wholesale power prices. Adjusted EBITDA fell around 28% to €1.54 billion, while GAAP earnings per share for 2018 came in at 54 euro cents, a drop from €3.09 in 2017.

Both net income and earnings were at the lower end of RWE's guidance range, while power generation also dropped to 176 billion kWh from 200.2 billion kWh.

"The declines compared to the previous year were anticipated, since electricity generation was down as planned and lower margins were realized, because we secure our electricity production several years in advance," CFO Markus Krebber told journalists at a news conference.

RWE said it expects adjusted EBITDA in the range of €1.2 billion to €1.5 billion and adjusted net income between €300 million and €600 million for 2019. Although electricity prices will likely stage a mild recovery, the company said that missing payments from the U.K. capacity market and legal trouble involving one of its coal mines in Germany will weigh on its results.

Krebber said RWE has so far received only €50 million in U.K. capacity payments during the ongoing market period, instead of a planned €100 million. The European Commission is currently investigating the country's backup power scheme following an EU court ruling that suspended payments previously awarded to power generators, who are paid for providing standby capacity to counter supply shortfalls.

The U.K. government has said it is confident the program will be reapproved and plans to eventually pay capacity market participants for the roughly £1 billion that will likely not be doled out on schedule.

In Germany, RWE has been forced to adapt its lignite mining plans after a court recently sided with environmentalists trying to block the company from clearing a forest standing in the way of its Hambach mine. Krebber said the reduced activity at Hambach, which supplies RWE's nearby power plants, would reduce the company's adjusted EBITDA by approximately €100 million to €200 million per year for 2019 to 2021.

Germany is also preparing laws to mandate a coal phase-out over the coming two decades in a move that will have a major impact on one of RWE's core businesses. CEO Rolf Martin Schmitz said that the company has just started talks with the government to agree on a framework for the closely watched issue of compensation for shutting down coal power plants.

Schmitz said RWE, which last year cut a deal to absorb the renewables divisions of subsidiary Innogy SE and rival E.ON SE partly in response to Germany's shift away from nuclear and coal power, would benefit from the fast pace of renewables expansion at both companies, with ongoing projects including E.ON's construction of the 475-MW Nysater onshore wind farm in Sweden and Innogy's construction of the 860-MW Triton Knoll offshore wind farm in the U.K. and the 349-MW Limondale solar plant in Australia.

Under the deal, RWE stands to absorb the economic results of the swapped assets from the start of 2018 onward, regardless of when the transaction is completed.

"The 'new RWE' is already growing and thriving. Because after completion of the transaction, not only will we have the existing portfolio of E.ON and Innogy with a capacity of around 9 GW, we will also have an attractive pipeline of projects," Schmitz said.

RWE said that it expects to return to a dividend payout-based policy of adjusted net income from the 2020 financial year onward.