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Innogy results paint positive picture for RWE, mixed bag for E.ON

Germany's largest utilities, RWE AG and E.ON SE, are preparing to restructure their businesses in dramatic ways. At the heart of their transformation lies RWE subsidiary Innogy SE, whose mixed performance may have starkly differing implications for both companies' future growth.

Innogy won't exist for much longer in its current form since a decision by the European Commission on breaking up the company is expected in September. But the company's trajectory is crucially important for RWE and E.ON. Under the €40 billion asset swap, RWE will refocus its activities on power generation, absorbing both Innogy and E.ON's renewables businesses, while E.ON will take over grid and retail units from Innogy and become a dedicated downstream utility.

Innogy reported on Aug. 9 a steep drop in profits for the first half of the year. The results were driven down in large part by its struggling U.K. retail unit NPower which, like its main rivals, is reeling from a customer exodus to smaller suppliers and a regulatory cap on its tariffs that cut into earnings.

Innogy has lost 238,000 U.K. customers year over year and expects the unit to post an adjusted operating loss of €250 million for 2019. As a result, it forecasts that its overall adjusted EBIT in retail could halve from €654 million in 2018 to between €300 million and €400 million this year.

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Growth at Innogy is squarely focused on renewables.
Source: American Wind Energy Association

That may not bode well for E.ON, whose own U.K. retail unit is still making money but has lost around 400,000 customers in the country so far this year.

Grid earnings at Innogy are also forecast to drop, although that is partly due to the sale of Innogy's Czech gas business. Despite a tightening of grid returns in Germany, the segment — by far Innogy's largest — will likely provide E.ON with a predictably stable income source in the future.

"Clearly the Innogy retail division represents an opportunity for E.ON to turn around," Deepa Venkateswaran, an analyst at Alliance Bernstein, said in an email. Regulatory interventions in Poland and Hungary are also adding pressure.

On a conference call on Aug. 9, Innogy CFO Bernhard Günther offered little reassurance to investors that things might pick up. Contrary to what the big suppliers had expected, he said that churn rates in Britain have not slowed down yet, despite the tariff cap.

"I think that is the disturbing realization," Günther said. "It might still materialize, but so far it hasn't."

"I would not speak of a relaxation or an all-clear in the British market," he said on a separate call with journalists, adding that Innogy is "slimming down" NPower to its "valuable core" activities, in part by implementing 900 previously announced job cuts.

At the same time, Innogy expects to increase earnings from renewables from €299 million to between €400 million and €500 million this year, as income from power generation is propelled by new capacity additions.

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Although the better result partly reflects a recovery from bad weather effects in 2018 and higher market prices, the company is on track to significantly grow its portfolio. In addition to its 3.6 GW of renewables in operation, Innogy is already building 1.4 GW more and forecasts an additional pipeline of 5.4 GW out to 2024.

"Step by step, we're bringing new capacity to the grid and investing in promising future projects," CEO Uwe Tigges said.

The company has been expanding its green energy portfolio in recent years, as the German market for onshore wind, in particular, has been dogged by lawsuits and slow permit approvals. Innogy is currently building an 860-MW offshore wind farm in the U.K., a 242-MW onshore wind farm in the U.S. and a 349-MW solar photovoltaic project in Australia. It recently won the right to build a 600-MW offshore farm in France together with Electricité de France SA and Enbridge Inc.

That diversification squares with RWE's plans to focus mainly on international markets after the takeover.

At Innogy, investments in renewables grew the most year over year in the first half, from €178 million to €349 million, although grid and infrastructure spending still made up more than half of the total. For the full year, Innogy expects net investments of €2.5 billion, compared to €1.8 billion last year.