RWE recovery lags peer E.ON partly due to gas deals

FRANKFURT Tue Aug 14, 2012 7:57am EDT

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FRANKFURT (Reuters) - Profit growth at RWE (RWEG.DE) lagged that of its main peer E.ON (EONGn.DE), reflecting a slower adjustment by Germany's No.2 utility to the country's exit from nuclear power and underlining the group's need to renegotiate expensive gas contracts.

RWE said on Tuesday its core earnings (EBITDA) rose 9 percent year-on-year to 5.04 billion euros ($6.23 billion) compared with E.ON's 55 percent increase posted on Monday.

RWE said a recent agreement on price adjustments with Norwegian gas supplier Statoil (STL.OL) had helped the earnings for the first half of the current financial year.

But it was still renegotiating with two gas suppliers about the price of 11 billion cubic meters of gas procured by RWE each year, while E.ON has largely completed its renegotiations.

The group declined to name the suppliers but said that renegotiations would affect deliveries from Russia and the Netherlands, where players such as Gazprom (GAZP.MM) and Gasterra dominate the market.

"The present framework conditions are anything but favorable," Chief Executive Peter Terium said.

"Mounting state intervention in the energy sector, shrinking power plant margins and fierce competition in electricity and gas supply are all challenges we are facing," he added.

Gas contracts have been a major problem for European utilities which are being squeezed as they buy gas under long-term deals concluded with companies such as Gazprom or Statoil when prices were firmer, while having to sell it to customers at lower retail prices.

Renegotiated gas contracts had helped E.ON to post its strong first-half results.

At 1043 GMT, shares in RWE were down 0.4 percent, while E.ON was 0.5 percent higher, both underperforming a 0.9 percent rise of the Stoxx Europe 600 Utilities Index .SX6P.

SLIMMING DOWN FAST

European utilities are struggling with weak energy demand at home, forcing them to slim down after years of acquiring assets and piling up debt.

RWE confirmed it would axe another 2,400 jobs, bringing total cuts at the company to about 10,400.

Germany's top utilities are only just emerging from the downturn caused by the government's decision last year to shut all nuclear power stations in the country by 2022.

Last month, EnBW (EBKG.DE), Germany's third-largest utility, said first-half sales at its gas unit rose by one third because of an expansion in gas trading activity.

RWE's net profit for the six months through June fell 0.4 percent to 1.58 billion euros ($1.95 billion) while E.ON posted a tripling of net profit to 3.13 billion and group earnings before interest, tax, depreciation and amortization (EBITDA) of 6.7 billion.

"The numbers were mixed, some were higher than expected, some lower. Overall, they are OK," one trader said.

DZ Bank analyst Hasim Senguel kept a "buy" rating on the company's shares.

RWE said that as part of its efficiency and cost-cutting programs it would set up a European power generation company grouping German, British and Dutch coal and gas-fired power stations.

The new entity will include all plants operated by the German RWE Power, Germany's biggest power producer, Britain's RWE npower and Essent in the Netherlands.

($1 = 0.8096 euros)

(Additional reporting by Andrea Lentz; Editing by Maria Sheahan and Anthony Barker)

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