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The German government’s final decision on coal plants is favorable for RWE. Old plants will receive capacity payments. But there will be a very limited power price impact. The shares trade in line with the sector despite weaker profitability prospects and a less attractive dividend. I expect the short-term bounce to reverse. RWE’s ( OTCPK:RWEOY ) share price has risen 7.5% on the back of the German government’s final decision on coal plants . The government had previously proposed legislation for a levy on old coal plants that would have meant a de facto shut down. RWE’s plant would have been the main casualty. As a result of fierce opposition, the Economic Ministry has amended the draft bill and published a revised decision. The final decision is favorable for RWE for several reasons. There will not be any forced shut down of coal plants. And 2.7GW of old coal capacity will be brought into a strategic reserve from 2017. Effectively, they will be mothballed. But they will receive capacity payments. The CO 2 emission reduction of 22mt by 2020 that is targeted by the government should be achieved through new combined heat and power, as well as gas plant builds. I expect RWE to furnish the bulk of the plants that will be brought into the reserve. RWE is the most important coal-based power generator in the country, followed by E.ON ( OTCQX:EONGY ) and Vattenfall. It also has some of the oldest coal reactors in the country. The exact amount of the capacity payments is as yet unclear. But the industry has reportedly demanded eur 300/kW pa. That would correspond to an implied load factor just short of 60%, according to my gauge likely above current achieved load factors. The plant in question was already running at very low load factors and not likely cash flow positive. The remunerated shutdown will therefore be marginally positive. But in the greater context of things, it is worth noting that this makes up no more than 6% of RWE’s overall fleet. I estimate an impact on German power prices in the order of eur 2-3/MWh long term through limited positive merit order effects. But that is, by far, not enough to make RWE’s plant profitable. Furthermore, over time, the impact will get eroded again from more renewables builds. The German power market is severely oversupplied, and any plant other than renewables and a low-cost lignite plant is running on very weak utilization rates. My model suggests that even with the mothballing, the market will remain in firm oversupply. For more detail on the impact on RWE, see my previous article: ” German Government Provides Relief For RWE .” As a whole, the key feature in RWE’s investment case is its struggle with weak power prices and low utilization rates of its generation plant. The reason is its very coal heavy fleet. About 40%-45% of the company’s plant is currently not cash flow positive. The company is looking to shift the company’s profile toward decreasing the weight of conventional power generation and increasing the weight of renewables, supply, and regulated activities. But as I have argued before , even though I see that strategy as positive, it will take a long time still to make a meaningful impact on the company’s earnings profile. With all of the above, I see the rebound on RWE’s share price as short-lived. The shares now trade at a P/E of 12.7x 2016E, which is in line with the sector despite the company’s weak profitability outlook. The same holds true for the 4.5% yield. The impact of the positive news is not large enough on earnings for a major re-rating. RWE has said it may not rule out an E.ON-style split any longer. That might offer a prospect of share price recovery, but investors should keep in mind that E.ON’s generation business is significantly more attractive. I expect E.ON to resume its outperformance over RWE. Editor’s Note: This article discusses one or more securities that do not trade on a major U.S. exchange. Please be aware of the risks associated with these stocks. Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. (More…) I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article. Scalper1 News
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