Analyst view: RWE and Eon – How the mighty have fallen

RWE and Eon, Germany’s leading 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 that are expected as the losses of the RWE-owned Npower mount. Last year, its operating loss was no less than €137 million, compared with a €227 million profit in 2014.

At a general level, it is barely conceivable how far the two companies’ fortunes have fallen over the last decade, especially since they are key players in Europe’s largest economy.

However, the premature ending of nuclear power generation in Germany by 2022 and the EU’s unremitting efforts to close down coal-fired plant have caused untold financial problems for both companies.

The relative share price performances tell a sorry tale. Since peaking in December 2007, RWE’s share price has plunged a staggering 89 per cent; the fall for Eon is almost as bad, at 83 per cent. By comparison, the UK’s National Grid has seen its share price rise over the same period by a solid 31 per cent.

Aside from suspending its 2015 dividend – to the barely disguised anger of some municipal shareholders – RWE reported unadjusted EBITDA (Earnings before Interest, 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, whilst 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 impairment charge was made in respect of German and UK power plants.

Ominously, RWE went on to warn that prospects in the conventional power generation business “have worsened further”.

There was some good news as RWE eventually concluded the tortuous sale of RWE Dea in 2015; this was key in cutting the dangerously high net debt figure by almost a fifth when 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 a third lower than the 2015 out-turn.

In trying to reverse this trend, RWE has two specific initiatives. The first involves major re-organisation as RWE seeks to emulate Eon by splitting its existing operations 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.

Secondly, RWE will press for greater efficiencies, especially from its conventional power generation portfolio.

RWE has highlighted its struggling Npower operations, which will be “restructured comprehensively”.

It cites, in particular, operating and technical problems in the UK supply business, where its customer service reputation is low, as exemplified by last year’s unprecedented £26 million fine.

The expected 2,400 UK job losses are a direct consequence of the strategy to turn round npower.

Nonetheless, the degree of RWE’s commitment to the UK energy market is unclear; recent returns have been meagre. And, if Brexit were confirmed next June, RWE’s already wavering resolve may well weaken further.

Eon’s 2015 results were less high-profile, but hardly impressive. Nonetheless, chairman and chief executive, Dr Johannes Teyssen, described them as “solid operating results in a very difficult market environment”.

Compared with normalised EBITDA of €8.4 billion for 2014, Eon reported a decline to €7.6 billion for 2015: underlying net income for 2015 was almost identical to the 2014 figure of €1.6 billion.

As expected, there was a massive €8.8 billion impairment charge, mainly generation-related, which reflects the real financial pain from low conventional generation returns from which Eon is suffering; this scenario seems unlikely to reverse for some time.

And even Eon’s renewables business has been adversely impacted by a shortfall in hydro-power output.

Inevitably, too, Eon’s exposure to Russia – both in terms of oil/gas and power generation – is having a pronounced impact on overall currency-adjusted returns.

However, unlike RWE, Eon is holding its dividend payment at €0.50 per 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 energy assets.

The residual Eon business will focus on renewable generation, networks – with c440,000 kilometres of energy networks in Germany alone – and customer solutions; 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 probable 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 is a Director of Nigel Hawkins Associates which undertakes investment and policy research