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RWE Profit Slumps on Nuclear Exit Costs, Gas Unit Loss

RWE Profit Slumps 34% on Nuclear Phase-Out Costs
An employee walks through RWE AG's Emsland gas fired-power station in Lingen, Germany. Photographer: Jock Fistick/Bloomberg

RWE AG, the second-largest utility in Germany, said full-year profit fell 34 percent on the cost of phasing out nuclear power and losses from supplying natural gas.

Recurrent net income, the measure used to calculate the dividend, fell to 2.48 billion euros ($3.25 billion) from 3.75 billion euros a year earlier, the Essen-based company said today. The result beat the 2.4 billion-euro median estimate of six analysts surveyed by Bloomberg.

Germany’s biggest utilities are overhauling operations as Chancellor Angela Merkel ordered the permanent closing of all nuclear plants by 2022 after Japan’s Fukushima disaster. Costs associated with nuclear shut-downs trimmed earnings by more than 1 billion euros, RWE said today. The company plans to divest 7 billion euros in assets between 2012 and 2013 and start cost-cutting measures totaling about 1 billion euros through 2014.

“We have introduced the necessary measures to get us through the trough quickly,” Chief Executive Officer Juergen Grossman said in a statement. Grossman will be succeeded by Peter Terium in July. “I am optimistic that the program can be implemented in agreement with the workforce.”

RWE is selling assets such as its Czech NET4GAS gas-grid unit and a stake in local utility VSE. The company may also divest its interest in Berlinwasser Holding AG, part-owner of the German capital’s water utility. The 7 billion-euro disposal program, down from 11 billion euros in assets sales proposed last year, will be completed by the end of 2013, RWE said.

Growth Beyond 2013

“Although the shift in RWE’s disposal program underlines our concerns over RWE’s growth beyond 2013, we believe RWE’s share price will react well to 2013 guidance at the upper end of expectations,” Bank of America Corp.’s Christopher Kuplent said in a note to investors.

Recurrent net income in 2012 and 2013 will be similar to 2011 earnings, helped by increased oil and gas production at the company’s RWE Dea unit, RWE said. The division contributed 558 million euros to the 2011 operating result. Nuclear taxes and oil price-linked gas contracts will weigh on earnings.

RWE closed down 0.1 percent at 34.445 euros in Frankfurt trading, valuing the company at 21 billion euros.

Cost Savings

Improved operating procedures and cuts in administration spending will save the company 750 million euros in 2013 and 250 million euros in 2014, RWE said. It’s committed to a payout ratio of 50 percent to 60 percent of recurrent net income and proposed a dividend of 2 euros a share, down from 3.50 euros.

RWE’s cost-cutting program will “raise efficiency, which means to reach more with the same,” Terium said. “It’s about reducing costs, and that can affect procurement or taking less capacity from third parties. It may also affect jobs.”

Losses from the company’s mid-stream gas business widened to 800 million euros in 2011 from 21 million euros a year before. The unit is unlikely to recover before 2014, and will probably report a loss of about 500 million euros in 2012, according to Credit Suisse.

RWE is among European utilities fighting above-market gas-supply rates charged by OAO Gazprom, Russia’s gas-export monopoly, and is in arbitration with the Moscow-based company. Gazprom Deputy Chairman Alexander Medvedev said in February he was “optimistic” about settling pricing disputes.

Total Generation

The utility will spend 16 billion euros on property, plant and equipment through 2014. Around 4 billion euros will go toward boosting RWE’s renewable energy generation to at least 20 percent of the utility’s total generation mix by the end of the decade from 8 percent last year. Renewable energy division RWE Innogy will contribute as much as 500 million euros to 2014 operating profits, Terium said.

More than 60 percent of the company’s capital expenditure will come from outside its home market in coming years. RWE said it plans to “achieve organic growth primarily in Central and Eastern Europe, where the energy consumption trend is dynamic compared to our markets in the northwest of Europe and which still have some ground to make up in terms of infrastructure.”

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