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Lower power prices, squeezed margins see RWE's Q1 earnings slide 25%

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Nuclear, lignite prices reach 'trough' at Eur28/MWh

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Lower wholesale electricity prices and squeezed generation margins have seen RWE's earnings fall another 25% in the first quarter of 2018, Germany's biggest power producer said Tuesday.

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Adjusted net income fell to Eur517 million ($616 million), but the company still expects to achieve its operational goals for the year especially as power prices have started to rebound sharply, it said.

RWE achieved an average price of Eur28/MWh for its lignite and nuclear power generation, down from Eur31/MWh in 2017, it said.

"From today's perspective, this means that we have reached the trough," it added.

Q1 power output was down 13.7% on year at 49.9 TWh amid the closure of its 1.3 GW Gundremmingen B reactor and two old lignite units, it said.

Looking forward, RWE flagged a "lower average hedge price for 2020 due to strong decline of spreads since the beginning of 2018" despite the company being financially hedged for it CO2 position until end of 2022 with the average hedged CO2 price in the range of Eur5-6/mt, it said.

"We believe that spreads are fundamentally undervalued especially for years further out and expect a rebound," RWE CFO Markus Krebber said during an earnings call. "For 2020 we keep [outright power] positions open."



RWE is one of Europe's biggest emitters of CO2 despite an 11% decline to 132 million mt in 2017 with its German lignite fleet accounting for two-thirds of its total emissions.

Hedging for its lignite and nuclear output in Germany is estimated to drop from an 85-90 TWh range this year to an 80-85 TWh range for 2019-21. RWE has moved from a fully hedged position to an implicit fuel hedge currently covering 80% of 2020 and 30% of 2021 output at an average price of Eur29/MWh, slides for an investor presentation show.

For its coal- and gas-fired European power generation segment, hedging levels have declined from over 90% for 2018 to below 10% for 2020 and 2021 with estimated output levels in a stable range between 50-70 TWh, the slides show without giving price details for the so-called spread hedging positions.

RWE also flagged a "significant decline of fuel spreads since the end of 2017," a trend which has strengthened since the end of Q1 into May as increased geopolitical risk lifted the energy fuel complex adding to already sharp gains for gas, coal and EUA carbon allowances, pushing clean dark spreads for coal plants in its core markets Germany, the Netherlands and the UK to record lows.

RWE offered its expertise for the planned German coal phase-out commission which will be tasked by the government to guarantee the achievement of the 2030 climate targets with CFO Krebber saying that RWE is still expecting "some [coal closure] action in the early 2020s" despite sharply tightening surplus margins.

RWE also expected compensation payments from the German government from a nuclear exit court ruling relating to a 27 TWh shortfall in nuclear output, it said.

Strategically, the execution of the planned Innogy transaction with E.ON will be key this year and next, RWE management said, adding that the asset swap would focus RWE completely on power generation giving it a very strong renewables unit.

--Andreas Franke, andreas.franke@spglobal.com

--Edited by Jonathan Loades-Carter, newsdesk@spglobal.com