RWE Says Gas Strategy to Proceed, Despite Innogy

German utility giants RWE and E.ON have released annual results and talked more about their plans for Innogy, with generator RWE saying it won't be holding back on its plans to expand gas-fired generation. Historically it has relied heavily on coal and nuclear.

To recap from their stock market releases early Sunday March 11, E.ON will offer €40 ($49.30) per Innogy share (inclusive of 2018 and 2019 dividends) for the 23.2% of Innogy shares not held by RWE: that totals €5.2bn ($6.4bn). Innogy assets will be split out, with networks and retail going to E.ON, renewables and gas storage to RWE (which owns 76.8% of Innogy).  RWE will also receive 16.67% of the enlarged E.ON, while E.ON will receive €1.5bn cash from RWE. E.ON will also transfer its own renewables business to RWE plus minority stakes in two nuclear units.

Innogy management was not involved in talks leading to the transaction, both firms said, as they were a matter for shareholders only. “You’d be surprised at how fast the talks went,” RWE CEO Rolf Martin Schmitz told a joint E.ON-RWE press conference March 13: “We discussed overnight.” He added that a director on both RWE and Innogy supervisory boards, Erhard Schipporeit who is also Innogy chairman, did not take part in the talks. 

Schmitz also said there would be no change to RWE’s gas strategy, and that gas already accounts for nearly 40% of RWE’s overall [European] generation capacity: “We intend to grow and selectively supplement our portfolio especially in the gas business.”

Both firms said the overall transaction “could be completed by the end of 2019” and in any case would not be fully effective until some time in 2020. It requires approvals from two German financial regulators, plus relevant antitrust and regulatory authorities.

E.ON CEO Johannes Teyssen told the press briefing: “We're turning turn three companies – E.ON, RWE and Innogy – into two strong, innovative and clearly focused German companies for a better future of energy in Europe.”  On the previously announced plan to merge Innogy’s joint energy retail business in Britain with that of SSE expected to complete by 1Q2019, Teyssen said that would be completed before the overall (Innogy deal) approval. That Innogy GB stake would sit within the future enlarged E.ON business.

Both RWE and E.ON said the integration process will lead to a reduction of up to 5,000 jobs of the then significantly more than 70,000 jobs at the enlarged E.ON, or less than 7%, but added that E.ON expects to “create thousands of new jobs in the coming decade.”

Both companies also released annual results March 13, in E.ON’s case one day earlier than schedule.

E.ON said its 2017 net income was €3.93bn ($4.8bn), reversing its net 2016 loss to shareholders of €8.45bn. It also reduced debt to €19.25bn at end-2017 from €26.32bn one year earlier.

RWE 2017 net income was €1.9bn ($2.3bn), reversing a 2016 net loss of €5.71bn. Adjusted pre-tax earnings from the RWE Supply & Trading division rose to €271mn, a rebound from its loss of €139mn in 2016 and above its expected €200mn 2017 result. The company said additional future growth is targeted in energy trading, particularly in the LNG business.

Update May 14: Innogy's management and supervisory boards said May 10 they are not giving a recommendation either for or against the E.ON takeover offer. They believe the offer of €40 per Innogy share is "fair" in its absolute value, but that a definitive assessment of relative value is not possible due to private agreements between E.ON and RWE. Innogy also expressed concern that E.ON's "vague announcement that it intends to cut 5,000 jobs" had caused considerable uncertainty among Innogy's 43,000 staff. Innogy on May 14 reported 1Q net income of €642mn, up 2% year on year, and signaled plans to divest its Czech gas assets before E.ON can acquire them; Reuters reported May11 that Czech group KKCG had submitted a bit for Innogy's Czech assets. Innogy confirmed April 20 that it had received potential buyer interest in its Czech assets.

The joint E.ON-RWE press conference March 13, with centre-left E.ON CEO Johannes Teyssen and centre-right his RWE counterpart Rolf Martin Schmitz (Photo credit: both companies web-streaming of the event)