npower scandal RWE Replaces Top U.K. Managers

RWE, Germany’s second-largest utility, is removing two top managers at an underperforming unit in Britain. But its problems are far from over and go all the way up to its supervisory board.
The IT department of N-Power is hopelessly outdated, said one manager.

It all happened quickly in the end.

Tuesday last week, Handelsblatt reported on a new trouble spot for Peter Terium, the chief executive officer of RWE, Germany’s second-largest electric and gas utilities company after E.ON. There were indications of mismanagement at RWE’s British subsidiary, npower.

On Thursday, the German utility admitted to considerable burdens in its interim report and now, Mr. Terium is firing both npower’s chief executive, Paul Massara, and the chief financial officer, Jens Madrian, people familiar with the matter told Handelsblatt.

According to the sources, npower’s new chief executive will be Paul Coffey, who became npower’s chief operation officer in April.

The British problem comes at a time when Handelsblatt learned RWE will also lose one of its supervisory board members, Daimler chief executive Dieter Zetsche.

The two developments place more pressure on the utility, which is struggling to adapt to the phasing out of its nuclear business and switch to renewables such as solar and wind power.

Under the government’s Energiewende, or energy transformation program, Germany in 2011 announced a program to phase out all nuclear energy in the country by 2022 and draw at least 80 percent of energy from renewables by 2050.

The German chancellor, Angela Merkel, made the move after the Fukushima disaster in Japan.

RWE, which produces almost all of its electricity by burning coal and gas, had to write down billions of euros on coal- and gas-power plants since then and has slashed its dividends from €4.50 ($5.00) in 2008 to €1.00 last year.

Faced with new problems in Britain, Mr. Terium appears to be taking decisive action, but the issue has existed for a long time. RWE’s corporate headquarters in Essen in northwest Germany has long been aware that npower was having serious problems with billing and, as a consequence, with its quality of service, the people familiar with RWE operations said.

One manager noted that while the British subsidiary ranks third in electricity sales and fourth in gas sales in Great Britain, its billing systems remained hopelessly out of date.

The situation created a considerable public relations problem. Customers complained publicly about absurd bills. In 2014 alone, npower lost 350,000 customers in the highly competitive British market. Meanwhile, serious issues with information technology created massive internal problems at npower including double billings sent to 5.5 million customers.

Mr. Massara and Mr. Madrian had taken their current positions in January 2013, but apparently didn’t address the problems. Mr. Coffey, who now succeeds as CEO, was placed at their side as chief operating officer.

Previously, Mr. Coffey had worked at RWE Innogy, a subsidiary responsible for the renewable business. It was only when Mr. Coffey joined that the full extent of the problems came to light.

While operating profit in the British energy supply business rose in the first quarter, it collapsed in the second, which sent earnings at npower plunging 60 percent to €53 million ($59.4 million) in the first half of the year.

RWE had already warned investors and analysts it wouldn't meet the unit’s previous forecast of a modest profit increase for the whole year. In fact, the financial division now expects “a substantial deterioration in the results” at npower.

RWE didn’t go into details when contacted by Handelsblatt. The utility has, however, in the past admitted to “unexpected operational and technical problems in the U.K. supply business.” Those probles were attributed to “process and system problems in the private client billings.”

Meanwhile, RWE is dealing with upheaval on its policy-setting supervisory board.

In addition to the departures of its chairman, Manfred Schneider, and board member Ekkehard Schulz, the former Thyssen-Krupp chief executive, Dieter Zetsche, the chief executive of Daimler, also plans to resign from the utility's supervisory board next April at RWE’s annual shareholder meeting, people familiar with the matter told Handelsblatt.

Speculation over Mr. Zetsche's potential departure was reported by German business weekly Manager Magazin.

The Daimler executive, who has been successful in increasing sales and profitability at the luxury carmaker, has much on his plate, persons familiar with the matter said. Mr. Zetsche is not only managing the entire Daimler group but its core Mercedes-Benz brand.

His supervisory post at RWE hasn’t been particularly joyful for Mr. Zetsche. He joined RWE’s supervisory board in 2009, when the energy company rushed from one record-setting profit to the next under the leadership of his friend, Jürgen Grossman.

Since those heady days, RWE has become a poster child for corporate distress, as the company has been forced to make a major restructuring amid Germany’s transition to renewable energy.

The volatility has made decision making difficult. Under German law, unions are represented on RWE’s supervisory board, while 24 percent of its shareholders are municipalities, which are politically sensitive owners reluctant to back reforms for fear of cutting jobs in their regions.

The RWE chairman Mr. Schneider could use Mr. Zetsche’s departure to raise the number of women on RWE's board before he steps down. But the person slated to replace Mr. Schneider as chairman is a man: Werner Brandt, the former SAP chief financial officer.

Meanwhile, it will be years before npower and RWE get things back on track. The energy company is aware the issues won’t be resolved before 2017.

Mr. Terium, the RWE chief executive, is getting pressured by investors to act quickly. After the interim report last week, RWE shares, which had already taken a beating, plunged further. By Friday morning, shares had lost another 16 percent and fallen to €15.09, to their lowest levels in more than a quarter century.

Analysts point to two unpleasant surprises in RWE’s first-half report. First, the tax ratio had risen surprisingly and, second, the company hadn’t taken the U.K. problems into account through provisions against earnings.

In the end, the catalog of problems at RWE, even without Britain, is long.

RWE's nuclear, coal and gas power plants are being driven from the market by wind and solar energy. The profitability of traditional energy is a thing of the past and is pulling down RWE. In the first six months of the year, the group’s operating results fell 11 percent while net profit plunged by 28 percent.


Jürgen Flauger covers the energy market for Handelsblatt, including electricity and gas providers, international market developments and energy policy. Lukay Bay, a reporter at Handelsblatt, contributed to this article. To contact the author: [email protected]