German utility deal turns coal veteran RWE into green giant

London

GERMANY'S biggest energy producer is grabbing onto a lifeline from the clean energy business in the utility industry's biggest shakeup in years.

RWE AG's move to take renewable power generation assets from Innogy SE in a complex asset swap puts the German utility back in a business that it shed when it spun off Innogy in 2016. That would help bolster earnings that face decline in coming years as the government forces nuclear and coal plants to shut.

RWE reported an increase in full-year earnings on Tuesday while forecasting a decline in financial performance in 2018. That underscores the need for chief executive officer Rolf Martin Schmitz to find new growth as Chancellor Angela Merkel pushes Germany's utilities to switch to less polluting forms of generation. Embracing green energy may offer a path towards higher profits.

"For RWE, it is a game changer - it was a dying business, now it has a life," said Per Lekander, a fund manager at Lansdowne Partners UK LLP. The deal, he said, will help RWE build a "more sustainable generation business".

At the moment, RWE's biggest power generation assets in Germany are the ones that pollute the most, using a soft form of coal called lignite.

Mrs Merkel has vowed to close both nuclear and coal power plants in Germany's ambitious transition to a green economy. RWE spun off Innogy to concentrate on traditional power plants.

RWE will own emissions-free generation capacity of about eight gigawatts after the integration, making it Europe's third-biggest renewable energy company, and the second biggest in wind, according to a statement late Monday. The combination of conventional power and clean energy will help transform the energy system and meet climate targets, while the existing trading platform will link the businesses, Mr Schmitz said in the statement.

"This deal would transform RWE into a leading European utility for renewables and security of supply," Ahmed Farman and Charlotte Chiew, analysts at Jefferies International Ltd., said in a research note. "The ability to extract greater value by the combination of holding renewable and thermal assets in the same portfolio may also be part of the motivation behind the deal."

While Germany's new government has indicated it wants to wind down coal use, uncertainty remains on the date and pace of any shutdowns, unsettling the outlook for RWE's earnings. The coalition has said it's seeking a role for coal to fill a power gap when nuclear energy is shuttered in 2022, while still eliminating the fossil fuel.

"The phaseout of coal and lignite power would trim RWE's own generation capacity," Elchin Mammadov and Amira Waziri, analysts at Bloomberg Intelligence, said in a note. "The proposed asset swap with EON would allow RWE to partly offset the planned closure of its thermal power plants."

To ensure security of supply, RWE targets growth in gas-fired power generation, a cleaner fossil fuel that already makes up about 40 per cent of the company's total capacity in Europe. The company also plans to expand its liquefied natural gas trading, according to the earnings statement.

The deal with EON still requires regulatory and anti-trust reviews and is expected to close by the end of 2019.

"Management appears to have found a workable solution to the conundrum of what to do with its Innogy stake," Lueder Schumacher, an energy analyst at Societe Generale SA, said in a research note. "This should finally allow investors to focus on RWE standalone, where we would see value." BLOOMBERG