Europe’s two biggest utilities reported their first-half results this week, nearing a test for the new units they have created, separating new and conventional energy assets.
At both E.ON and RWE, the new energy units comprise renewable power, grid networks and retail sales, separated from fossil fuel energy and trading, to target growth markets, and more stable, regulated incomes, given that renewables are often supported by government subsidies, and grid networks earn regulated returns.
But there are also big differences. E.ON is spinning off its conventional energy assets, now called Uniper, to exit completely over time. RWE will separate its new business, now called innogy, and retain a large, majority shareholding.
The tactics raises two questions; first, how far deep-rooted are the changes, and second, what investors will make of it.
Both RWE and E.ON missed the boat on renewables, until now at least. Of some 200 gigawatts (GW) installed renewable power capacity in Europe, E.ON has 2.1GW and RWE 3.1GW. Now, both remain saddled with historical debt. E.ON has a fairly chunky “net economic debt” burden at 3.7 times pre-tax earnings or EBITDA. RWE is targeting a net debt/EBITDA ratio of 4 for innogy.
And both retain some conventional assets and/ or German nuclear liabilities.
Showing how these continue to drag, E.ON reported on Wednesday new Uniper provisions of €3.8 billion, including a €1.5 billion write-down on just two power plants (E.ON wouldn’t divulge which, only saying that they were both conventional assets outside Germany).
Going forwards, even after E.ON exits its last shares in Uniper, it will retain its legacy nuclear business, and the substantial pay-out for waste disposal and continuing liabilities for decommissioning that looks set to involve.
Unlike E.ON, RWE plans to keep its conventional assets. That may highlight tensions over time. In its first-half results published on Thursday, RWE emphasised its commitment to future lignite mining beyond 2030, and “the importance of domestic lignite over the long term for ensuring a secure and affordable energy supply.” But lignite is the most polluting and highest carbon-emitting form of power – definitely not new energy.
Regarding what investors will make of it all, we will see soon enough.
While the strategic motivation was to enter high-growth markets in digital, centralised energy networks and generation, the financial motive was to raise cash through higher valuation, whether in the new or old assets or both. E.ON floats Uniper next month, and RWE issues shares in innogy at the end of the year.
Investors may remember that other European utilities, EDF, Iberdrola and Enel, have all hived off minority stakes in their green energy businesses in the past, at attractive valuations, only to buy them back at a discount. The parent companies always kept control, and were ultimately the biggest winners. If investors didn’t make money last time, they may be more cautious this time around.
For E.ON, a low valuation of Uniper will force it to make further writedowns, as it said in its first-half results this week. “If the stock-market listing of Uniper SE results in a market valuation that is below the Uniper Group’s proportional net assets, E.ON SE would have to record an impairment charge.”
Meanwhile RWE is only issuing a 10% share in innogy, and so the amount of cash it raises, either way, may be limited.