RWE Profit Falls 62%, Missing Estimates, on Power Generat

RWE AG turned to a second-quarter loss, missing analyst estimates for the fifth consecutive time, after a surge in clean-energy power generation stifled prices at Germany’s biggest electricity producer.

The loss was 89 million euros ($119 million) in the three months ended June 30, compared with a recurrent net income of 691 million euros a year earlier when finances were boosted by cash won back from a renegotiated contract with OAO Gazprom. Sales fell 16 percent to 10.4 billion euros. The numbers were calculated by subtracting first-quarter earnings from half-year results announced today.

German Chancellor Angela Merkel’s shift toward subsidized renewables and away from nuclear energy has led to an increase in wind and solar generation, cutting power prices already weakened by slow European economic growth. RWE and larger utility EON SE are reducing capital spending and selling assets to cut costs. RWE is also in negotiations with investors to sell and lease back its Essen headquarters.

Recurrent net income, used to calculate dividends, dropped 62 percent to 749 million euros in the first half from a year earlier, RWE said today in a statement. That missed the 790 million-euro average of eight estimates compiled by Bloomberg. EON yesterday reported a 20 percent decline in first-half profit.

‘Significant Miss’

“RWE disappointed in comparison to EON,” Sven Diermeier, an analyst at Independent Research GmbH, said by phone from Frankfurt. “They significantly missed expectations regarding recurrent net income.”

RWE fell 2.1 percent to 28.685 euros by the close in Frankfurt, the day’s worst performer on both Germany’s benchmark DAX index and the STOXX 600 utilities Index. The stock has gained 7.8 percent this year, compared with a 3.4 percent decline in the benchmark DAX Index.

German month-ahead wholesale power prices averaged 30.53 euros in the second quarter, the lowest in at least seven years, and were 5.8 percent below last year’s level, according to data compiled by Bloomberg.

“Conventional power generation is losing ground,” Chief Executive Officer Peter Terium said in the statement. “This does not bode well for security of supply, to which wind and solar can make little contribution.”

German Households

He reiterated his call for a market design that compensates companies keeping secured generation capacity on tap. This so-called capacity market would guarantee security of supplies and cost the average German household less than 1 euro per year more than the current system, he told reporters today on a conference call.

Terium didn’t rule out additional asset disposals. In March, RWE agreed to sell oil and gas production unit, Dea, to a group led by Russian billionaire Mikhail Fridman for 5.1 billion euros.

RWE said today it plans to terminate additional supply contracts for about 500 megawatts of conventional generation capacity and reiterated it will decommission another 1,000 megawatts of capacity by 2017. That will add up to about 9,000 megawatts of capacity being idled in continental Europe.

The utility cut the 2014 operating profit forecast of its Innogy renewables unit to “significantly below 2013” levels from “moderately above,” according to a presentation today. That revision follows unfavorable wind conditions, poor water supply and delayed projects, Deputy Chief Executive Officer Rolf Martin Schmitz told reporters on the call.

Net income rose to 1.02 billion euros in the first half from 979 million euros a year earlier. Sales fell 9.6 percent to 25.1 billion euros. Finances last year were boosted by a one-time gain of about 1 billion euros before taxes. RWE lobbied with Gazprom for a fairer deal as spot prices slumped below its long-term contract with the Russian gas supplier.

RWE confirmed its full-year target for a recurrent net income of 1.2 billion euros to 1.4 billion euros.

“I estimate they will end the year in the bottom part of the guidance,” Independent Research’s Diermeier said.

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