Exclusive Exclusive: RWE's Conventional Business Will Soon Be Loss-Making, Says Boss

Germany’s second-largest utility RWE expects to start posting losses in two to three years’ time from its conventional energy business due to low energy prices, its bosses Peter Terium and Rolf Martin Schmitz told Handelsblatt. The energy firm is banking on the spinoff of its renewables and distribution divisions to offset the loss-making parts of its operations, the pair said in an interview. Earlier this year, RWE raised its savings target to €2.5 billion to be saved by 2018 compared to 2012. By late 2015, RWE had already realized €1.6 billion of that sum. The utility had slipped into the red last year. Looking ahead, the situation will remain a fight. “We’re still profiting from the fact that we sold electricity in advance. It’ll get pretty tight in 2018/2019,” said Mr. Schmitz, who will head the conventional coal, gas and nuclear operations after RWE’s planned split. Spinning off the new renewables unit, tentatively dubbed NewCo, will help generate money for the conventional power business, Mr. Schmitz said. “The next step is that NewCo will also be a source of income for RWE,” he added. The executives suggested further cost-cutting measures at RWE to safeguard the company’s financial targets. “I don’t think we’ll be able to avoid more cuts, particularly in 2018 and 2019, when it gets really tight,” said Mr. Schmitz. Mr. Schmitz also did not dismiss the possibility of RWE and E.ON, Germany’s two largest utilities, going bankrupt under prolonged low energy prices in Germany. “Everything is conceivable,” he said, adding: “But I think it is absolutely unlikely. The low electricity price cannot continue, otherwise the whole market is going to collapse.” Mr. Schmitz also suggested that RWE AG, the businesses comprising the conventional coal, gas-fired and nuclear power plants, could grow through acquisitions. “Why shouldn’t RWE AG benefit from consolidation in the industry at some point?” he asked during the interview, adding: “We don’t have any concrete plans for that.” Mr. Terium, the designated head of the still-to-be created renewables unit, said that the firm will be attractive to investors. “Distribution and network offer an attractive investment in a stable market that is highly regulated and essentially offers a predictable return,” he said. He rejected the notion that RWE is selling the silverware – the profitable grid and renewable energy production – in order to finance conventional power generation. “We’re not selling piece by piece, but instead are keeping the entire collection together and handing it over in its entirety to a new company in which shareholders can invest,” he told Handelsblatt. Mr. Terium also acknowledged that “cancelling the dividend has not been easy for shareholders.” If and when RWE will be paying dividends again is not clear yet, according to the chief executive. “We can’t say anything concrete about the dividend,” he said, adding: “I can only promise that we will make every effort to pay a dividend again.” Both managers also rejected the notion of copycatting the structural changes at competitor E.ON, whose boss Johannes Teyssen had announced the spinoff of its conventional power business from the renewables operations last summer. “I believe our strategy is the better one,” said Mr. Schmitz, partly because nuclear energy will also be included in the conventional power unit at RWE, but not at E.ON. Mr. Terium, who had first rejected Mr. Teyssen’s strategy and then ordered the split of RWE, said his about-turn was due to financial reasons. “I’m still convinced that the concept of an integrated utility is right. When electricity prices are just under €30 – as they were last summer – that’s still possible. At €25, not anymore,” he said. The two are confident that their strategy will convince employees and investors. “The regulated business offers a high degree of security – and right now, that’s exactly what investors are looking for. A decent return on NewCo shares is better than a negative interest rate on your savings,” said Mr. Terium.   Picture source: Dirk Hoppe for Handelsblatt