otcmktsrweoy – Scalper1

German Government Provides Relief For RWE- But That Won’t Turn The Share Price

The planned levy on old coal plant will most likely be scrapped. RWE will see a positive impact on two sides: Most of its plant will keep running and the one that won’t will receive capacity payments. The relief bounce of the shares is justified, but the news is not enough to reverse longer term performance. The likely prospect of an absence of the coal levy is a great relief for the German generators. Contrary to previous developments, this time the biggest beneficiary is RWE ( OTCPK: OTCPK:RWEOY ). I short term relief, but prefer E.ON ( OTCQX: OTCQX:EONGY ) for longer term exposure. According to German news source ARD, the Economy Minister will drop the planned coal levy . The Ministry has said it is looking at alternative plans. Reportedly, the government is looking to mothball 2.7GW of old coal plant over a time frame of four years, in order to push forward towards its emissions reductions target. Old hard coal plant under the CHP (combined heat and power) regime would be shut first, in order to substitute that plant with gas CHP. The government would look to cover the 5.5mt shortfall against its emission reductions target through other measures, such as support for heat pumps and unspecified measures at municipalities. The Minister has said he will publish a final decision July 1st. Considering the wordings of comments by several senior government and State level officials across the coalition parties on the matter over the past couple of days, I see the likelihood as the coal levy being off the table. “Realpolitik” and industrial policy seem to have won the argument. The impact on the domestic lignite industry would have been too important to bear. Further, under energy considerations, especially security of supply and affordability, lignite is a fuel that is abundant and cheaply available from domestic sources. It is clear, that there will be another impact on affordability. The CHP repartition will increase end user prices. But so would the coal levy ad power price impact have done. Mothballing of old capacity would almost certainly hit RWE alone. It has over 7GW of coal capacity that is over 37 years old. But, on balance it might be a positive. The plant runs on very low load factors. On the other hand, the Minister has said there would be compensation for such reserve plant. RWE and Vattenfall would thus receive capacity payments. On a side note, the part of the mothballed reserve plant invites questions relating to potential capacity payments. The government has several times articulated a less than supportive position for capacity payments. And certainly, if any they might be for gas in the first instance. But these plans could be interpreted as a de facto start of a remunerated capacity reserve. With that, I see the relief bounce for RWE as justified. But we doubt that there will be any reversal of performance. For that, the structural challenges on the overall profitability of the generation business are too steep (for further detail on my fundamental views see my previous article on SA – Why RWE remains uninspiring ). 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.

RWE – Recovery Postponed, Indefinitely?

RWE has warned earnings will not as expected bottom out in 2015. It will also struggle with its debt target. The announced strategic moves are not enough short term relief. Political risk is high with major pieces of legislation in a controversial debate, namely capacity markets and climate legislation. RWE is the most exposed within the peer group. As power markets in Europe get taken over by new structures, volatility and earnings risk, energy system infrastructure is a better investment proposition. RWE’s ( OTCPK:RWEOY ) earnings warning weighs stronger short term than its strategic moves. The company will continue to struggle with weak commodities and high leverage in 2015, despite the DEA sale. It may embark onto some rescuing of value through power plant sales, but it does not have the potential to deliver a similar strategic boost to E.ON. RWE is at the heat of the political storm that still has high potential to deliver more unpleasant surprises. Infrastructure and the private sector, conversely, might be beneficiaries. There are signs that private investors with longer strategic horizon are circling around distressed assets. They will gain a more important part in a decentralized energy market. Asset rotation will be a feature. My view of increasing M&A activity remains underpinned. RWE is not out of the woods yet; investors who were hoping for earnings stabilization as indicated by the company in April 2014 may be disappointed. Management has warned on earnings , saying that the earnings trough may not occur in 2015 yet. Consensus has not bottomed out for 2015 yet and it may still come down. Power prices are the unsurprising cause of the problem. Futures are pointing nowhere to a meaningful enough recovery, and the broader commodities environment is not any more supportive. RWE more than any of its peers, needs significant commodity recovery. In tandem with the above comes relentless balance sheet stress. I find little chance of material decrease of leverage. The Urenco sale will not come through short term. The CEO has further confirmed that leverage falling to 3x net debt/Ebitda by 2016 will be “extremely difficult to achieve”. I estimate just short of 4x for 2016. Attention will swiftly return to risk to the dividend. RWE may rescue some value through selling its power stations that are unprofitable abroad as announced this week. That is clearly a strategy to mitigate cash losses. It would bring minor debt reduction. Some of the company’s plant is new and competitive technology. The bulk of the RWE’s mothballing and closure programme is less than 20 years old, some plants are not even three years from commissioning. That concerns particularly gas. It is sensible that management looks to maximise value of otherwise potentially stranded assets. But, a power plant cannot be displaced and sold into another location like other capital assets. High quality and well performing equipment may still find a market value in locations with tighter reserve margins and new build demand. The CEE region comes to mind. There is also an active secondary plant market also in Asia. There will clearly be a loss of value for RWE. Investors should not hold up high hopes of significant earnings contributions from the process. Signaling power to the political powers may be stronger than actual earnings impact. Infrastructure investors have begun to look at power generation with a view of power price recovery over the long term. The prospect for capacity payments may underpin that kind of activity. Germany is uncertain on that note, but plenty of European countries putting into place capacity markets could keep M&A activity up. All of RWE’s strategic moves could in the end amount to a similar outcome to E.ON’s corporate split. The company has been vocal about reducing the share of generation to 5% of earnings. Most recently, the CFO has now said it no longer rules out a similar move even though management decided against it in 2012. RWE is in a different situation to E.ON ( OTCQX:EONGY ), in that it cannot bring as diversified a generation park into any potential new co. Merging renewables into a “genco” may remedy to a point. But in that case management would have to have a clear strategy about how it would pursue downstream brand equity and service/product packing for which renewables exposure is important. A split co will also not have the same upstream and oil and gas diversification as E.ON. That would make a genco or “upstreamco” resemble much more of a bad bank than in the case of E.ON. Importantly, it would in my view have to raise capital in order to fund the nuclear liabilities that the genco would inherit. RWE might embark onto greater strategic change beyond its already announced transformational steps. That would be a positive. But with the chances increasing that more steps are taken, so does the probability of a capital increase. I see significant potential for large parts of RWE’s business going private. Meanwhile, the debate over capacity payments rages on. The Economy Minister’s has again repeated he is opposed to capacity payments , which is out of line with market expectations. The political debate bears high potential for disappointment. My preferred exposure in all of this is infrastructure, engineering and market backbone. Editor’s Note: This article discusses one or more securities that do not trade on a major exchange. Please be aware of the risks associated with these stocks.