RWE Dividends to Reflect German Power Prices Stuck in Slump

  • Germany's green shift crushing conventional plant margins
  • Little chance of power price rebound before 2020: CFO

RWE AG is aligning its future dividend payments to electricity prices that Germany’s largest power producer sees mired at the lowest levels in more than a decade.

The “forward looking” dividend policy reflects the “profound” transformation of the power-generation industry, especially in Germany, where market rates have fallen about 67 percent from a 2008 peak, Chief Financial Officer Bernhard Guenther said in an interview at the company’s headquarters in Essen. RWE suspended dividend payments for the first time in at least half a century in February as it applied the new policy.

Bernhard Guenther speaks in Essen.

Photographer: Jasper Juinen/Bloomberg

RWE and other utilities in Europe’s biggest power market are suffering from the weakest prices since at least 2002 as Chancellor Angela Merkel’s shift to renewable energy squeezes margins at coal and gas plants. At the same time, the companies must set aside billions to pay for the nation’s exit from atomic energy by 2022. RWE doesn’t see any significant rebound in wholesale electricity prices until the end of the decade.

“We don’t have any indication that the cavalry will come to our rescue on that front,” Guenther said, referring to the prospect of higher prices. The dividend policy “better reflects what we already see coming on the market side, i.e. power prices, and on the regulatory side,” he said.

German next-year wholesale power prices have plunged to 22.61 euros ($26) a megawatt-hour from more than 90 euros in 2008, according to broker data compiled by Bloomberg. Electricity for 2018 trades at 21.70 euros and the price for delivery in 2019 is 21.60 euros.

At forward prices of about 20 euros a megawatt-hour, the company’s lignite-fired generation business would be “cash-burning.” Even the cost of refueling RWE’s reactors may not be recovered within their remaining lifespan, forcing the plants to close before they have to.

“It’s really borderline,” he said. No decisions have been taken yet on early closures of lignite and nuclear plants.

RWE suspended its dividend to most shareholders as plunging electricity prices forced the German utility to write down the value of its power plants at home and in the U.K. by 2.1 billion euros, causing a net loss. Standard & Poor’s, Moody’s Investors Service and Fitch Ratings rank RWE’s debt at the second-lowest investment grade with negative outlooks.

The suspension was necessary as “we can’t afford the luxury of paying a dividend in a situation where our indebtedness and ratings are under pressure -– also from a cash-perspective,” Guenther said. It’s no longer “compatible with the long-term viability of the company.”

RWE holds its next annual general meeting on April 20.

“Aligning dividends to power prices is a very muddled approach as generation will only account for 10-15 percent of earnings in later years,” said Deepa Venkateswaran, a utilities analyst at Sanford C. Bernstein Ltd. “For investors, it would be clearer to give a payout ratio according to earnings metrics or free cash flows, for example.”

Local Impact

Canceling dividends will hit the local authorities that own 24 percent of RWE and rely on the annual payments to fund amenities from schools to hospitals. The city of Essen has already written down more than 800 million euros on its 3 percent stake in RWE over the last three years as the stock fell 63 percent.

Guenther and other RWE executives have been meeting with investors to explain the dividend policy.

“We could generate a bit more understanding on behalf of the shareholders,” said Guenther. He doesn’t expect a “significant” impact from the dividend decision on local supply contracts to be renegotiated.

To adapt to the changing power market, 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. Guenther spoke in his first interview since taking over as chief financial officer at the new company this month. He keeps his current role at RWE until the new unit’s IPO.

Stock Gains

Adjusted net income before writedowns fell 12 percent last year to 1.13 billion euros, RWE said in March. It reiterated its 2016 forecast of the profit measure of 500 million to 700 million euros.

The utility has risen 2 percent this year, making it the fourth-best performer in Germany’s DAX benchmark stock index, which has fallen more than 7 percent. RWE was the index’s worst performer in 2015, when it lost more than half its market value.

“We’re confident that RWE will be a DAX member” at the end of the year, Guenther said.

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