RWE Shuts Unprofitable Power Plants to Spur Generation Unit

RWE AG (RWE) will close power plants as Germany’s second-largest utility tries to revive profits at its electricity generating business.

The company will shut 3,100 megawatts of power plants in Germany and the Netherlands, about 7 percent of RWE’s capacity in northern Europe, and look at idling more stations, the Essen-based company said in a statement today.

RWE was the biggest decliner in the HDAX index of the 110 most valuable companies traded in Frankfurt after operating profit for conventional power generation fell 62 percent to 690 million euros ($915 million) in the first half from a year earlier. Weak European electricity demand and increased production of renewable energy has led to a power price slump, cutting margins for gas- and coal-fired plants.

“This is only the prelude for the industry’s capacity adjustment,” Thomas Deser, a portfolio manager at Union Investment GmbH who is responsible for the fund’s 54 million-euro stake in RWE, said in a phone interview from Frankfurt. “It’s imaginable that even nuclear reactors will be closed early.”

RWE’s recurrent net income, the measure used to calculate the dividend, rose 19 percent to 1.99 billion euros because of a favorable ruling in an arbitration with Russian gas supplier OAO Gazprom. (OGZD) That missed the 2.1 billion-euro average estimate of 12 analysts surveyed by Bloomberg. Sales advanced 5.2 percent to 28.5 billion euros.

All Options

“The massive reduction in power station margins is a major factor” in the decision to shut plants, RWE said. “Further power stations are being assessed and all options to improve the company’s economic efficiency are being explored.”

RWE is looking at the cost effectiveness of atomic power plants, planning to cut 2013 capital expenditure to 4.5 billion euros from the 5 billion euros previously announced and will cut more jobs than previously announced, Chief Financial Officer Bernhard Guenther said on a call with reporters.

The positive impact of having sold power generation in advance is likely to diminish in the next few years, the company said. It estimated costs resulting from the recently voted law on nuclear repository selection at 1.1 billion euros.

RWE and larger competitor EON SE are cutting costs and selling assets even after Chancellor Angela Merkel ordered the permanent halt of all nuclear reactors by 2022 following Japan’s Fukushima disaster. RWE said in March it would sell its Dea oil and gas unit to cut spending. The utility plans to raise as much as 5 billion euros through the sale, a person familiar with the matter said at the time.

Analyst Call

The deal is unlikely to be announced this year, Guenther said today on an analyst call.

RWE tumbled 4.5 percent to close at 21.355 euros in Frankfurt where 2.6 times the three-month average share volume was traded.

The utility confirmed its full-year forecast for recurrent net income of 2.4 billion euros and operating profit of 5.9 billion euros, below last year’s level, while Guenther didn’t rule out writedowns in case market conditions worsen.

EON yesterday said profit fell 42 percent in the first half after divestments, reduced output and narrower margins on generation from fossil fuels.

To contact the reporter on this story: Tino Andresen in Dusseldorf at tandresen1@bloomberg.net

To contact the editor responsible for this story: Will Kennedy at wkennedy3@bloomberg.net

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