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Germany's RWE output, earnings hit by coal, lignite, nuclear plant closures, lower margins in H1

Highlights

H1 output down 16% at 88 TWh

Stable outlook confirmed

Coal exit debate drives new strategy

London — Coal, lignite and nuclear plant closures as well as falling generation margins hit RWE's first half 2018 financial performance, Germany's biggest power generator said Tuesday.

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German output from conventional plants declined 18% on year to 54.2 TWh, mainly due to the closure of the Gundremmingen-B reactor and the Voerde coal plant, as well as removal of two lignite units to the security reserve.

Output from coal- and gas-fired plants in the Netherlands and the UK was down over 4 TWh at a combined 28 TWh as falling generation margins reduced running hours.

In all, H1 group generation was down 16% on year at 88 TWh.

German lignite and nuclear unit earnings were most impacted, down 58% on year with EBITDA at its European Power unit down 12% on year.

Overall, adjusted net income was down 23% on year at Eur683 million ($779 million) with the company confirming its FY outlook of Eur1.5-1.8 billion for EBITDA.

LOWER MARGINS

RWE achieved an average hedged price of Eur28/MWh for its lignite and nuclear generation for 2018, down from Eur31/MWh in 2017. Prices had reached "the trough" earlier this year, the company said, with 2020/21 achieveing prices slightly higher at Eur29/MWh.

Earlier this year RWE said its CO2 positions were fully "financially hedged until end-2022" in the range of Eur5-6/mt. EU carbon allowances have more than tripled since last year to currently trade at a seven-year high above Eur18/mt.

Measures had been taken regarding RWE's open carbon positions beyond 2022, but those would not be disclosed as yet, CFO Markus Krebber said.

"We will expect the hedged prices to go up over time," the CFO said during an analysts call referring specifically to the open power positions for 2021.

Krebber said achieved generation margins from RWE's long-term hedging for 2018 and 2019 were broadly comparable to those in the market now based on current prices for power of Eur40/MWh-plus, and for CO2 of Eur18/mt.

For 2020/21, RWE had hedged just 10% of total projected European production of 50-70 TWh, amid a trend to delay long-term hedging. Over 80% had been hedged for 2019, however, with most "in the money" positions in this segment for power plants in the UK and the Netherlands.

The earnings decline was partially offset by higher income from UK capacity markets, where 6.6 GW were successful in the latest auction, RWE said.

RWE 'IS A NEW ANIMAL'

The coal exit debate in Germany and the Netherlands was driving RWE's strategy, with Krebber describing the "new RWE" as a "new animal."

A deal with E.ON involving RWE subsidiary Innogy, which will see Eur40 billion of assets transferred between Germany's two biggest energy firms, is set to transform RWE into Europe's third-biggest renewable energy company and the world's second-biggest operator of offshore wind farms, with plans to invest Eur1.5 billion/year into renewables, it said.

Regarding the German coal commission, tasked to set an end-date for coal-fired generation in Germany by December, RWE CEO Rolf-Martin Schmitz described this timetable as "too tight" given the complexity of the issue.

Schmitz warned that gas would not be able to replace coal without increasing energy dependency and costs, with RWE's preferred outcome a straight move from coal to renewables, with slow grid expansion the biggest hurdle to this.

NUCLEAR COMPENSATION

On the question of compensation for surplus nuclear production quota resulting from the nuclear phase-out, RWE confirmed it was talking to competitors about selling an estimated 27 TWh.

"If we cannot find agreement here we will have to wait until 2023 to get compensated by the government," Krebber said, adding that "in either case we expect a mid-three-digit-million-euro sum from this."

According to annual data published by Germany's nuclear body BfS, E.ON's PreussenElektra nuclear unit is the only operator significantly short of quota for its three remaining reactors, planned to operate until 2021/22.

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

--Edited by Maurice Geller, maurice.geller@spglobal.com