Regulatory risk chronically disabled title

When will RWE out of retirement While the resurrection of the merger Suez-gas of France stirs up the European electricity sector, the first German producer is conspicuous by its absence at the ball of the consolidation of the industry. And is a grand abandoned on the financial markets. A 82,40 EUR Friday at the close, his action gave 1.6 this year, re-profiled the German Stock Exchange ( 13.6 for the DAX 30) and the European sector of electricity ( 12 for the Bloomberg Europe Electric index). Décoté, its course is more than 12.7 times its estimated net income in 2008, against an average of 16.6 times for the sector in Europe, according to calculations by the Société Générale.

Even at these levels, action should continue to under-perform in view of the strategic and political uncertainties surrounding the value, say some, like the SocGen. The group led by Harry Roels acolytes believe on the contrary, like Merrill Lynch, that a number of uncertainties have been removed recently and that the course is ready to take off because it has already integrated the negative points of the group, starting with the first: the thorny problem of CO2.

RWE drags a dirty picture, in the sense of the term. King of the central coal and lignite, impure coal abundant in Germany, the group is the first polluter in Europe. He issued last year not less than 180 million tonnes of CO2 in total, including 150 million in Germany, against 90 million for his compatriot E.ON and 60 million for EDF. Result: RWE emissions and must purchase rights to pollute on specialized European awards. The Group estimates its needs for the purchase of emission credits to 70 million tonnes per year. A credit of one tonne currently marking 20 EUR, this would be 1.4 billion euros to purchase per year, RWE feels able to bring back to 1.1 billion by buying, cheaper credits from environmental projects validated by the United Nations.

The "carbon credit".

For now, RWE is not desperate because the CO2 quota system played for electricians. The cost of the "carbon credit" has passed on to the market price of electricity, making it climb. However half of the needs of RWE is covered by the free quotas allocated by Berlin. "In Germany, where RWE has a market share of 35, the electrical industries Federation considers EUR 6 billion additional profits made by the German electricians on 2005-2007 CO2 quotas system", comments John honored with Société Générale.

But RWE will suffer if the course of the carbon credit bid strongly. Because the elasticity of the price of electricity has its limits. "It finds generally, beyond 35-40 euros per tonne of CO2, the electricity prices follow, says John Honoré.". Therefore, the floor threshold which would induce the polluters to reduce their emissions. "The carbon credit should in any case bid with the" phase 2 "(from 2008 to 2012) of the European plan, which decreases free allocated quotas. Some frightening thereafter. The current price of CO2, "If the phase 3 completely removed quotas, the potential cost would be $ 3.6 billion per year and the result of operations (Ebit) of RWE in 2013 would be about the same level as in 2008", recently wrote Simon Flowers, at Merrill Lynch, which qualifies the "time bomb" CO2... while being passed to the purchase value on 14 August with a goal of 90 euros course.

Because, in the immediate future, the successful group. A 2.2 billion euros, its recurring net profit (excluding exceptional items) of the first half rose by 16 over a year, against 9 for E.It (3 billion). A performance due to the sharp rise in the price of electricity a year ago because RWE presents the characteristic of the German actor most sensitive to price changes. It produces more electricity than E.ON, even if the latter ranks first by its sales. "In Germany, RWE produced 184 terrawatts-time, or two thirds of the electricity it sells to final consumers, that E."It produces only 131 TWh and purchased the other half of its sales, explains John Honoré. In addition, RWE sells more to the wholesale market price: 182 terrawatts-hour last year, against 100 TWh for E.ON.

Focus on energy

A feature exciting for those who believe, as Dresdner Kleinwort, the price of electricity is structurally called up. "A euro to increase in the sale of electricity price increases net earnings per share of RWE of 3.5, 1.5 for E.ON," says Lüder Schumacher in DK. However, its favorite value remains EDF because, as a large producer, he has the strongest lever (6). For RWE, the lever becomes all the more noticeable that the group will re-Center on energy. It has sold its subsidiary British treatment of water Thames Water in December 2006 and American Water must be introduced on the stock exchange by the end of the year 2007, and then totally surrendered in 2008.

Uncertainty about the strategy

This mutation to the "all-energy" is well perceived by the market but it has a drawback: it increases the already excessive dependence of the group to the Germany. "A total output of American Water of perimeter means that three quarters of the operational result (Ebitda) in 2008 come Germany, said John Honoré. No other side continental group is also dependent on its domestic market. "And it is dangerous because it makes RWE very vulnerable to the vagaries of the German regulatory framework and a political power hostile to polluters keeping record profits while food prices... Regulatory risk chronically disabled title. In 2006, the regulator severely declined the compensation of the regulated activities. "The discussions should resume in September to review the law on cartels and the latter once reformed, could give to the authorities of the foundations to challenge prices" continues Lüder Schumacher.

We must therefore diversify risks out of the borders. But, even with the investments announced by RWE in new power plants to the United Kingdom and the Netherlands, Merrill Lynch estimated that 70 of the Ebit will always come to Germany in 2012. Acquisitions are therefore necessary. "RWE has set a goal of not to exceed 22 to 24 billion in net debt," said Peter Kernan in Standard & Poor's. The assignments in the water sector désendetté it or almost and it has a margin of manoeuvre for purchases that can go up to 25 billion and 30 billion. Problem: "OPA targets are rare, note John Honoré.". Outside of Centrica, which is its scope, the other companies without public shareholding is limited to E.ON and Iberdrola, which are worth much more.

Seven years of growth in the sector have made expensive targets. In the past, RWE had watched them but it was in the phase of relief and had preferred to remain cautious. In any event, "a strategic rapprochement by Exchange of securities would be more relevant, note Lüder Schumacher.". And we must see what opportunities will appear in the future to the East, Russia or Turkey, which are very strong growth markets.

In the meantime, RWE rest weapon at the foot. It is not candidate for the purchase of Russian electricians put up for auction in the liberalization imposed by the Kremlin. Perhaps because only the considers too expensive. Perhaps by wait. In February, Roels, the rectifier of the group, including through cost reductions, will be replaced by Jürgen Grossmann, a course leader of steel. It is still unknown of inflections that it will bring to the group policy. By February 2008, the uncertainty on the strategy of the future leader will weigh on the title.