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Gas plant optimization offsets lignite, nuclear margin squeeze for RWE

Declining margins in RWE's lignite and nuclear generation business wereoffset in 2017 by a recovery in supply and trading and an unexpectedly strongEuropean power performance, the German utility said Tuesday in a resultspresentation.

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* 38% revenue hit for lignite, nuclear

* European power revenue 'above average'

* Strategy focused on gas generation

Output for the division was being hedged at Eur28/MWh ($34.50/MWh) for2018 versus Eur31/MWh for 2017, RWE said.

Revenue of Eur671 million from lignite and nuclear production last yearwas 38% down on 2016, with the outlook for 2018 lower again, seen at betweenEur350 million and Eur480 million.

Reduced earnings were also seen at Matra, the Hungarian lignite miner andpower producer, in which RWE has a 50.9% stake. In December, RWE and EnBWagreed to sell their Matra stakes to a consortium of EP Holding of the CzechRepublic and Hungarian investor Lorinc Meszaros.

The decline in lignite and nuclear revenue "comes as no surprise since2018 will merely reflect the full impact of the very low levels of electricityprices seen in past years," RWE said.

"We're prepared for this," CEO Rolf Martin Schmitz said. "We planned tocut our cost base by Eur300 million annually between 2016 and 2019 and we havealready achieved more than half of this. Furthermore, we can observe a slightimprovement in wholesale electricity prices. On the whole, we are optimistic."

RWE data showed lignite and nuclear hedged at Eur28/MWh in 2019, beforerising to Eur31/MWh for 2020, with RWE noting a "significant improvement" infuel spreads through 2017 for calendar 2019 and 2020.

Here, the data showed the Cal 19 fuel spread (a composite of clean darkand clean spark spreads) rising towards Eur5/MWh in late 2017, while the Cal20 climbed over Eur6/MWh.

European power revenue bucked the trend in 2017, up Eur86 million or 23%to Eur463 million, the result of above-average commercial optimization of gas,coal and biomass power station dispatch, improved efficiency and the sale ofthe Littlebrook site in the UK. The Dartford site was sold to Tritax for GBP65million ($09 million) in July.

"We expect that our stations will become more profitable as securedgeneration capacity becomes tight," RWE said.

In the long run, this should benefit gas-fired power stations inparticular, it said.

As margins had already recovered somewhat, RWE had been able to bringback the mothballed Unit G at its Gersteinwerk gas plant in Werne, Westphalia.

A strong rebound in Supply & Trading, meanwhile, saw earnings recover toEur271 million versus a loss of Eur139 million in 2016, with improvedcontributions from gas and LNG.

In terms of strategy and core focus, RWE said it would look to developits portfolio of gas-fired power plants, which already accounted for 40% ofits generation capacity.

"One specific area of focus in this field will be the cooperation withindustrial customers," it said.

Additional growth was targeted in energy trading, in particular in itsLNG business.

In general the company had a pipeline of around 50 projects of varioussizes being pursued independently or with partners.

These ranged from new storage facilities for electricity and theexpansion of customer services to the use of biomass fuels from agriculturalwaste products, it said.

--Henry Edwardes-Evans, henry.edwardes-evans@spglobal.com

--Edited by E Shailaja Nair, shailaja.nair@spglobal.com