RWE Says 2011 Profit to Fall 30% on German Tax, Power Prices

RWE Says 2011 Profit to Fall 30% on German Tax, Power Prices
An RWE AG nuclear power plant cooling tower operates in Lingen, Germany. Photographer: Hannelore Foerster/Bloomberg

RWE AG, Germany’s second-largest utility, said profit will fall about 30 percent this year because of a tax on its nuclear reactors and “stagnating” power prices. The shares fell the most in 10 months.

Recurrent net income, which it uses to calculate the dividend, will fall from last year’s 3.75 billion euros ($5.17 billion), the Essen-based company said in a statement today. RWE said it plans to sell assets, reduce spending and extend cost cuts to grapple with the slump.

German Chancellor Angela Merkel wants to raise an annual 2.3 billion euros in the six years through 2016 with a tax on the country’s nuclear stations to help plug the budget deficit. RWE, which operates four German reactors as well as generators that burn coal and gas, also faces slowing earnings as fuel costs rise faster than wholesale power prices in the region.

“The outlook for 2011 and 2013 is weak,” said Michael Schaefer, an analyst with Equinet AG in Frankfurt who has an “accumulate” recommendation on the stock. “You also have to consider that the 2013 forecast includes the effect of the divestments.”

The shares fell 5.2 percent to 49.39 euros when trading closed in Frankfurt at 5:30 p.m. for the biggest decline since April 23. That valued the company at 27.8 billion euros.

Reduce Debt

RWE said it plans to reduce debt by selling assets to raise as much as 8 billion euros by 2013 and will cut investments through 2013 by 3 billion euros to 18 billion euros. The company will extend its cost-cutting program by 200 million euros and now expects the measures to increase operating profit by 1.4 billion euros in 2012 from the 2006 level.

“Despite our positive performance over the past year, I have no cause for celebration,” Chief Executive Officer Juergen Grossmann said in a speech today. “We will increasingly be directing our efforts toward the market of central-eastern and southeastern Europe in the future, where the demand for energy and the need for investment are equally high.”

Adjusted earnings before interest, tax, depreciation and amortization will fall about 15 percent this year from 10.3 billion euros in 2010, while operating profit will drop about 20 percent from 7.68 billion euros, the company said.

RWE faces higher costs in 2013 when it will pay for all the carbon dioxide its European power plants emit. Ebitda will be about 8 billion euros that year, the operating result about 5 billion euros and recurrent net income about 2 billion euros, RWE said. The average estimate of 16 analysts surveyed by Bloomberg for recurrent net income in 2013 was 2.65 billion euros.

Asset Sales

The asset sales will slice 1 billion euros from Ebitda in 2013, 700 million euros from operating profit and 300 million from recurrent net income, according to the statement.

Recurrent net income rose 6.2 percent in 2010 on higher power prices and the acquisition of Dutch competitor Essent NV. The average estimate of 22 analysts surveyed by Bloomberg was for 3.74 billion euros. RWE recommended a dividend of 3.50 euros a share for 2010, unchanged from the payment for 2009.

RWE, Europe’s largest corporate emitter of carbon-dioxide, bought operations from Essent last year to access cleaner power plants and add Dutch and Belgian customers.

The shares have dropped 22 percent in the last 12 months, valuing the utility at about 27.6 billion euros. Larger rival E.ON AG has fallen 9.9 percent, while the benchmark German DAX Index, which includes both companies, gained 27 percent.

Essent Acquisition

RWE bought Arnhem, Netherlands-based Essent in September 2009 for about 7.3 billion euros, gaining 2.6 million customers as well as renewable energy projects.

The German utility was able to increase earnings during the global slump because of electricity supply contracts that were set before a plunge in energy use. German electricity prices, a European benchmark, have since failed to track gains in the cost of fossil fuels, reducing the profits of coal-fired generators.

Utilities in the European Union will have to pay for all the CO2 their power stations emit starting in 2013 as the bloc implements rules to cut greenhouse gas output.

RWE said today that the German nuclear tax will cut earnings by an average 600 million euros to 700 million euros a year starting in 2011.

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