September 17, 2015 / 2:25 PM / in 3 years

Investors shun German utilities on nuclear clean-up uncertainty

* Real costs of nuclear shutdown cannot be reliably assessed

* Estimates range widely from 30-70 billion euros

* Lack of clarity depressing German utility shares

By Christoph Steitz and Vera Eckert

FRANKFURT, Sept 17 (Reuters) - Investors are dumping shares in Germany’s utilities, worried that the struggling firms might need to raise more capital to pay for the shutdown of their nuclear reactors, a plan that some estimates say could cost up to 70 billion euros ($79 billion).

Concerns over the level of nuclear provisions sent shares in E.ON and RWE into a fresh tailspin earlier this week, even prompting a government denial that described as “irresponsible” any speculation about further funding needs.

Their market capitalisation has halved over 2015 and now stands at a combined 22 billion euros, equivalent to only about a fifth of the value of pharmaceuticals group Bayer, badly hitting funds that have to own these stocks as part of their broader holdings in German blue chips.

Pressure will remain until results of a review of the provisions, commissioned by the Economy Ministry and due to be published in autumn, have been released, showing how much sentiment in the sector is now dictated by government moves.

“The government basically now has a tool in its hands with which it can put these two companies out of business if it wants to,” said Martijn Olthof, senior portfolio manager at asset manager APG, which owns shares in E.ON and RWE according to Thomson Reuters data.

The provisions debate marks a new low point in already strained relations between utilities and the German government.

Tensions can be traced back to 2011 when Germany hastily decided to pull out of nuclear energy more quickly in response to the Fukushima disaster in Japan, condemning reactors to an early closure and utilities to even tougher rivalry with subsidised renewable energy.

“The Energiewende is an existential threat to utilities like E.ON and RWE,” said Andrew Shepherd, Senior Power And Renewables Analyst at BMI Research, referring to government energy policy.

“We do not see a change in this situation, the operating environment will be increasingly punitive.”

At the heart of the conflict lies the question of whether the currently amassed provisions of 39 billion euros made by the country’s “big four” nuclear utilities — E.ON, RWE, EnBW and Vattenfall — are sufficient.

Estimates for the total clean-up costs differ widely, ranging from about 30 billion euros to 70 billion. That is down to the complexity of the dismantling process, which takes several decades, and the separate and even more uncertain issue of putting nuclear waste into a final storage facility underground.

“We are talking about long-term investments and commitments and at the moment it looks as if further provisions are being justified without companies having any idea of how to generate the financial means to cover them,” said Michael Bormann, partner at law firm Simmons & Simmons.


The lack of clarity is making investors panic.

If clean-up costs rise, the more likely it becomes that utilities would have to sell shares to raise additional capital, possibly having to generate tens of billions of euros. This, in turn, would heavily dilute existing shareholders and pressure shares even further.

“If the utilities need to increase provisions, chances for a capital hike increase,” said Oscar Tijs, senior investment analyst at asset manager NN Investment Partners.

“As long as you don’t know that you don’t have to raise equity, these stocks can go anywhere,” he added.

This is also scaring off potential new investors.

A dismal price-to-book ratio, the lowest among European peers, showing German utilities trade at only 0.7 times their book value, indicates just how much confidence in the sector has eroded.

The firms, in turn, maintain their provisions are high enough, an assessment borne out by their annual accounts which are reviewed and approved regularly by external auditing firms.

Politicians’ fears that the public could be landed with additional bills were triggered late last year when E.ON announced it would hive off its share of provisions, about 16.6 billion euros, into a separate unit.

The move was viewed in Berlin as an attempt to shirk responsibility for the decommissioning costs.

Berlin has since announced it would change laws to make sure E.ON and its peers will never be able to escape their financial responsibility.

The companies say these costs should be shared, arguing that the use of nuclear power was always sanctioned by the state and benefited citizens and industry alike over decades of inexpensive electricity.

However, it is the government that gets to decide.

“The lesson from the E.ON saga is that governments will always have the last word,” said Fabien Roques, analyst with international research firm FTI-CL Energy. ($1 = 0.8834 euros) (Additional reporting by Geert de Clercq in Paris; Editing by Keith Weir)

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