EUR 850.00 For Business Accounts Only

Morningstar | RWE’s Fundamentals to Significantly Improve After the Asset Swap With E.On

Since 2011, RWE has been heavily hit by the collapse of power prices and the upheaval of German energy policy, which led to the dividend cancellation between 2015 and 2018. As of 2016, the backdrop has improved with the rebound of power prices and the EUR 1.7 billion nuclear fuel tax refund in mid-2017. Therefore, RWE paid a EUR 0.50 per share dividend in 2018 plus a a EUR 1 per share special dividend in 2018. After splitting off its noncommodity businesses into Innogy in October 2016, RWE retained only its conventional generation and commodities businesses, along with a 76.8% share of Innogy. Under a large asset swap with E.On announced in early 2018, RWE will sell its stake in Innogy to the latter but will retain Innogy’s renewables business. RWE will also receive E.On's renewables division, as well as a 16.7% stake in E.On. The deal should be completed by year-end 2019. The deal rationale is stronger for RWE, as it will double its renewable capacity, becoming the third-largest renewable player in Europe, and shed exposure to retail and distribution activities, whose fundamentals and outlook are unappealing to us. RWE is the European utility most sensitive to changes in power prices. We calculate that a EUR 2 per megawatt-hour increase in generation spreads would add EUR 4 per share (16%) to our fair value estimate. The rise in European power prices since the beginning of 2016 will boost RWE's profits through 2023 as unfavourable hedging rolls off. Despite its coal-weighted generation fleet, we estimate that rising carbon prices would be positive because RWE's carbon intensity is slightly below the correlation between carbon and power prices. The German coal exit commission issued recommendations in January 2019 in which it set 2038 as the deadline to end coal generation in Germany. However, related early closures of lignite mines and coal plants will be financially compensated, which we assume will be value-neutral for RWE.