GERMANY’S largest utilities, E.ON and RWE, used to be known in the stockmarket as “widows’ and orphans’ paper”, so dependable were their profits and dividends. Those days are long gone. Since 2011, when the government stepped up its support for wind and solar energy and decided to abandon nuclear power after Japan’s Fukushima disaster, the share prices of both firms have plunged by two-thirds.
That is why both firms are splitting in two. Their aim is to free up their renewables businesses, allowing them to thrive relatively unencumbered by debts, while underpinning their earnings with boring but reliable returns from running electricity down pylons, poles and wires. Dirtier power-generating assets, exposed to the vagaries of climate politics and commodities prices, are being put into separate companies. In a culmination of this process, on September 12th E.ON plans to spin off Uniper, a new firm into which it has separated its coal- and gas-fired power stations. Later this year RWE will pull off a similar split, albeit in a different way.
The manoeuvres highlight the huge jolt Germany’s Energiewende, or green-energy transition, has dealt to the business model of what were once two of Europe’s most highly regarded utilities. “If I had proposed this [split] ten years ago, I would have been the laughing stock of the stock exchange and people would have sent me to the mental home,” says Johannes Teyssen, E.ON’s chief executive.
In its listing on the Frankfurt Stock Exchange, Uniper will issue 53% of its shares to E.ON shareholders, leaving E.ON with the rest. Uniper says it will offer investors a chance to bet on the changing nature of energy markets. Coal- and gas-fired power plants are being replaced by wind and solar as the main sources of electricity, but they will carry on playing a potentially lucrative backup role, goes the pitch. E.ON, in contrast, will seek a greener sort of investor. “Across Europe companies want to get rid of the “bad” fossil-fuel business. E.ON is the most radical,” says Roland Vetter of PraXis Partners, a utilities specialist.
RWE has followed a different route to the same destination. Instead of keeping its renewables, grid and local businesses, it has moved them, as well as many of its staff, into a new company, Innogy, which it will partially float. A tenth of Innogy shares will be listed in Frankfurt by the end of the year. The dirtier power plants will remain with the rump RWE.
Plenty have reservations about the coming listings. Some describe Uniper as a “bad utility”, much like the “bad banks” that were set up after the financial crisis of 2008-09 to hold dud loans. Others believe that E.ON is wildly optimistic about the value of the assets it has transferred to Uniper. The unit is held on E.ON’s books at a value of about €12 billion ($13.5 billion), but may be worth no more than €3 billion-5 billion when listed. “In the short term at least, the outlook for those plants is terrible,” says Emanuel Henkel of Commerzbank. To make matters worse, the company is not promising a fixed dividend beyond 2016. What’s more, it may turn out to be too small for index funds, which may force many investors to dump their new shares in short order.
E.ON’s own shares may perform no better. Initially the parent company had hoped to offload its nuclear-power plants and the cost of decommissioning them onto Uniper, marking a clean break with conventional power generation. But the government prevented that, on the ground that E.ON was ducking out of its responsibilities. Instead it will be required to provide the biggest share of a €23.3 billion decommissioning fund to be set up by the government, which will also require contributions from RWE and two other nuclear-power providers. To finance its share, E.ON may have to raise equity of its own. It will also remain tied to Uniper’s fossil-fuel fortunes because of its 47% stake.
RWE may have slightly better prospects with Innogy’s IPO, because the latter is much more clearly a clean-energy company, which is likely to attract new investors, and because it has learned from E.ON’s mistakes, says Mr Vetter. But the green-energy credentials of both the new E.ON and Innogy are open to question. In the past E.ON and RWE sought to slow Germany’s energy revolution rather than championing it. Mr Teyssen admits that the company once thought “windmills” were something “out of the Middle Ages”.
In their favour, they both have vast numbers of customers who could be persuaded to embrace renewable energy. Mr Teyssen prefers to see his company not as a dinosaur fighting extinction, but as a bird—the descendant of a dinosaur—flying into a bright future. Provided, that is, it doesn’t crash into a power pylon.
