RWE Jumps Most in 4 Months as Quarterly Profit Beats Estimates

  • First-quarter net income is 29% above analyst forecasts
  • Utility says proposed nuclear risk premium ‘irresponsible’

RWE AG rose the most in almost four months in Frankfurt trading, boosted by first-quarter profit that beat analyst estimates as “unusually high earnings” from trading countered slumping power prices.

Adjusted net income for Germany’s largest power producer slipped 2.3 percent to 857 million euros ($979 million), the Essen-based company said Thursday in a statement. The figure beat the 664 million-euro median estimate of 7 analysts surveyed by Bloomberg. The utility reiterated its forecast of 500 million euros to 700 million euros for the year.

Power prices near the lowest since at least 2002 and Germany’s shift to renewable energy are squeezing margins at conventional coal and gas plants in Europe’s biggest power market. To adapt to the changing power markets, RWE is pooling its renewables, grid and retail operations into a separate entity to be listed on the stock market by the end of the year.

Adjusted “net income is materially ahead of consensus and implies upside for consensus full-year forecasts,” analysts at Jefferies International Ltd. led by Ahmed Farman wrote in a note to clients.

RWE was the biggest gainer on the country’s benchmark DAX index. It closed up 6.8 percent, the most since Jan. 19, at 12.22 euros in Frankfurt, where volume was 67 percent above the three-month average. The utility was the DAX’s biggest decliner last year.

The operating result for RWE’s trading and gas midstream unit jumped to 166 million euros in the first quarter from 7 million euros a year earlier.

“We had an extraordinarily good quarter in energy trading but on the other hand, as expected, in conventional power generation we suffered,” Chief Financial Officer Bernhard Guenther said in a video on the company’s website. He cited increased market volatility for the trading profit in a call with journalists.

Uncertain Future

Earnings from trading are impossible to predict and just one on the list of “extremely high uncertainties for the remainder of the year,” which also include a ruling on the nuclear fuel tax in Germany’s supreme court later in 2016, said Thomas Deser, a fund manager at Union Investment, which holds RWE shares.

The operating result from conventional power generation dropped 20 percent to 354 million euros. German year-ahead wholesale electricity prices slumped 30 percent in the first quarter from a year earlier, according to broker data compiled by Bloomberg.

Net income including one-time effects, such as the sale of RWE’s DEA gas and oil unit last year, fell 59 percent to 879 million euros. Net debt increased 11 percent to 27.9 billion euros from the end of 2015 as negative free cash flow more than doubled. A “moderate” rise in borrowing is expected in 2016 compared with an earlier unchanged forecast.

Nuclear Risk

The risk premium proposed by Germany’s government-assigned commission on the funding of the country’s nuclear exit by 2022 would mean an “irresponsible” additional burden of 1.7 billion euros for RWE, Guenther said. The company is fighting for a “pragmatic and realistic” solution, he said.

“To plug the gap, RWE may be forced to sell a 10 percent to 20 percent stake” in its new unit on top of the 10 percent it already plans to list, Sanford C. Bernstein & Co. analysts wrote in a note to clients.

Union Investment’s Deser sees RWE’s risk of a debt downgrade is above average among European utilities.

RWE is “prepared” for a non-investment grade rating, Guenther said on a call with analysts, without saying whether he expected it to happen.

S&P Global Ratings, Moody’s Investors Service and Fitch Ratings rank RWE’s debt at the second-lowest investment grade with a negative outlook.

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