I found it quite amusing to hear Peter Terium, the CEO of the German utility RWE say that they needed new capital for growth and that it was very difficult for them to get that capital. I say this because he should count himself lucky that he can get any capital! He has lenders who continue to provide him debt and if he wanted to do an equity raise tomorrow he could do so very quickly. All he would need to do is ask the hedge funds who have been “short” his stock for the last years to cover their short positions by taking part in the capital increase! The bigger question though is whether current RWE shareholders would be happy with that capital increase and the resulting dilution which could negatively impact dividends unless RWE could make a return on that new capital which is greater than that cost of capital. That is highly debatable as we still do not have clarity around the future strategy, business model and earnings generating capability of RWE.
At least we know what the other big German utility E.ON wants to do and where it wants to go and to say the least that path is neither easy nor clear. But they are cleaning up their balance sheet and making positive efforts. Then we have Vattenfall the Swedish state owned utility who just wants to go home to Sweden where they can focus on becoming a CO2 neutral power generator. They have already started a sales process to sell their brown coal assets in Germany, the success of which depends totally on the German government. Worst case scenario is that Vattenfall will have to pay someone to take those assets off its hands with the risks that the German government will close them driving down valuation. Best case, the German government gives clarity around the decommissioning of brown coal across the country which allows Vattenfall to sell those assets for a positive amount. Then we have ENBW who has been the most forward thinking of the German utilities thanks to the leadership of the ex-EON executive Frank Mastiaux who has put in place a customer focussed strategy which he was blocked from implementing whilst he was at EON. Their advantage is that they have a low cost of capital thanks to their ownership by the German federal state of Baden-Wurttemberg and as a result they are the most active of the Big 4 in terms of investing in German renewables. They are also lucky enough to have the grid (transmission and distribution) as part of their group which gives them security of earnings. But that said their brand name is not as good as what their own management team would like. They tried to buy earlier in the year the renewable generator Prokon but it was rejected by their owners who opted instead for a much more risky and probably less financially lucrative alternative. And ENBW still have to decommission all those nuclear plants in southern Germany.
Thankfully, the German government has given the Big 4 a “stay of execution” by giving them the all clear that they have enough reserves on their balance sheets to meet their nuclear decommissioning liabilities. I don’t believe this is the case but the alternative would have been the financial meltdown of those utilities which would have been bad for shareholders (including many German communities), lenders, customers and most importantly the German tax payer.
That all said these utilities are really lucky not to be already bankrupt. Their saving grace has been a collapse in gas, coal and CO2 prices which has enabled them to make positive earnings from power generation in this era of low wholesale prices. The other factor that has been of great help has been the financial crisis, the result of which is that the world is awash with cheap debt, much of which has found their way onto the balance sheets of the utilities.
The good news is that management in the Big 4 finally realise they have to change and they still some time to make the necessary changes but they are going to be under massive competitive pressure from local municipalities such as Pfalz or MVV who have excellent brand names among customers and are highly active in renewables. In addition, many of them are very innovative. Take WEMAG for instance a small northern German utility which is home to the biggest battery system connected to the German grid. And then there is all the new competitors coming our way. The telecoms like Deutsche Telecom will enter the power market as will the automobile manufacturers such as Tesla and then there are the new generation of virtual community energy providers such as Sonnenbatterie and Beegy. And then we have the new technologies, the 4’s of solar, storage, semiconductors and software the combination of which is going to bring about a whole host of new business models and exciting new businesses. This mix of new technologies and new business models will also cause bigger changes to the power markets in the next five years than we have seen in the last five. And if I was a betting man I would not put money on there being a Big 4 in Germany in 2020.