Utility Week

Finance & Investment UTILITY WEEK | 18TH - 24TH MARCH 2016 | 15 Analysis R WE and Eon, Germany's lead- ing energy companies, have just announced their 2015 results – they do not make pretty reading. In the UK, the focus was inevitably on the 2,400 job cuts expected as the losses of RWE-owned Npower mount. Last year, its operating loss was €137 million, compared with a €227 million profit in 2014. At a general level, it is barely conceiv- able how far the two companies' fortunes have fallen over the past decade. However, the premature ending of nuclear power in Germany by 2022 and the European Union's unremitting efforts to close coal plant have caused untold financial problems for both. The relative share price performances tell a sorry tale. Since peaking in December 2007, RWE's share price has plunged 89 per cent. The fall for Eon is almost as bad, at 83 per cent. By comparison, National Grid shares gained 31 per cent in the same period. Aside from suspending its 2015 dividend – to the barely disguised anger of some municipal shareholders – RWE reported unadjusted Ebitda (earnings before inter- est, tax, depreciation and amortisation) of £7 billion. This figure includes some material extraordinary gains. RWE confirmed, too, that its operating profit was €3.8 billion, while adjusted net income was €1 billion. Compared with the halcyon days of the past, these figures are dire. RWE attributes them to "the continued collapse of wholesale electricity prices", which led "to an erosion of power plant margins". Furthermore, a €2.1 billion impair- ment charge was made in respect of German and UK power plants. Ominously, RWE went on to warn that prospects in the conventional power genera- tion business "have worsened further". There was some good news as RWE even- tually concluded the tortuous sale of RWE Dea in 2015. This was key in cutting the dangerously high net debt figure by almost one-fi¡h compared with December 2014. Nonetheless, net debt at over €25 billion is still a formidable level for a company whose capitalisation has plunged so alarmingly in recent years. The trading outlook for 2016 is hardly reassuring. RWE's chief executive, Peter Terium, has confirmed that Ebitda will fall sharply, but also that adjusted net income will be as low as €500-700 million, around one-third lower than the 2015 outturn. In trying to reverse this trend, RWE has two specific initiatives. The first involves major reorganisation as RWE seeks to emulate Eon by splitting its existing oper- ations into two companies. The new growth- orientated business will include the cash- generative networks operations and the retail-facing activities, along with RWE's growing renewables generation division, a segment that it had been slow to embrace. Second, RWE will press for greater effi- ciencies, especially from its conventional power generation portfolio. RWE has high- lighted its struggling Npower operations, which will be "restructured comprehen- sively". It cites, in particular, operating and technical problems in the UK supply busi- ness, where its customer service reputation is low, as exemplified by last year's unprec- edented £26 million fine. The expected 2,400 UK job losses are a direct consequence of the strategy to turn round Npower. Nonetheless, RWE's commitment to the UK energy market is unclear. Recent returns have been meagre, and if Brexit is confirmed next June, RWE's already wavering resolve may well weaken further. Eon's 2015 results were less high pro- file, but unimpressive, even though chair- man and chief executive Johannes Teyssen described them as "solid operating results in a very difficult market environment". Com- pared with normalised Ebitda of €8.4 billion for 2014, Eon reported a fall to €7.6 billion for 2015. Underlying net income for 2015 was almost identical to 2014 at €1.6 billion. As expected, there was a massive €8.8 bil- lion impairment charge, mainly generation- related, which reflects the real financial pain from low conventional generation returns. This scenario seems unlikely to reverse for some time. And even Eon's renewables busi- ness has been adversely impacted by a short- fall in hydro output. Inevitably, too, Eon's exposure to Russia – both in terms of oil/gas and power gen- eration – is having a pronounced impact on overall currency-adjusted returns. However, unlike RWE, Eon is holding its dividend pay- ment at €0.50 a share. Similarly, though, its net debt has fallen from €33.4 billion to just under €28 billion. Undoubtedly, 2016 will be a big year for Eon as it aims to complete the demerger of its new Uniper business during the summer. The latter will include mainly conventional power generation and upstream assets. The residual Eon business will focus on renewables, networks and customer solu- tions – these divisions will be the growth drivers. Even so, for 2016, Eon expects its underlying net income to be between €1.2 billion and €1.6 billion and, hence, a proba- ble decline on 2015's already mediocre figure. Overall, compared with the rosy future of just under a decade ago for both RWE and Eon, today's prospects look very grim indeed – unless power prices recover sharply. Nigel Hawkins, director, Nigel Hawkins Associates How the mighty are fallen It has been a disastrous decade for two of Europe's energy giants, Eon and RWE, and things don't look like improving for the German firms any time soon, says Nigel Hawkins. EON'S SHARE PRICE, 2002-16 RWE'S SHARE PRICE, 2002-16 150 100 50 0 2004 2006 2008 2010 2012 2014 2016 100 80 60 40 20 0 2004 2006 2008 2010 2012 2014 2016

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