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Strength of RWE's Innogy lies in stable returns, stagnation
October 5, 2016 / 3:26 PM / a year ago

Strength of RWE's Innogy lies in stable returns, stagnation

* Earnings visibility driving strong demand for shares

* Innogy not without challenges

* Faces lower fees in network business, renewables competition

* Retail unit to remain low-margin business

By Christoph Steitz and Tom Käckenhoff

FRANKFURT/DUESSELDORF, Oct 5 (Reuters) - Innogy, comprised of the healthy units of ailing German utility RWE , debuts on the stock exchange on Friday and will tempt investors with its strong reliance on regulated business and its dividend strategy.

Two-thirds of Innogy’s core profit comes from stable power and gas networks, whose returns are set by regulators, providing earnings visibility over several years and a major opportunity for infrastructure investors and pension funds.

With a planned payout ratio of 70-80 percent of adjusted net income and an expected dividend yield of 4-5 percent, Innogy also beats placing cash in a bank account due to the European Central Bank’s zero interest rate policy.

Books for the IPO are already covered twice over, with shares expected to be priced at the upper end of the range.

But Innogy is no ‘golden goose’.

While it may not suffer from the ultra-low wholesale prices and legacy costs for nuclear waste storage that have badly hurt its parent, it does face challenges - primarily its lack of growth potential.

Below is a list of issues confronting Innogy.


Regulated power and gas networks are the core of Innogy, accounting for 2.9 billion euros ($3.26 billion), or 64 percent, of earnings before interest, tax, depreciation and amortisation (EBITDA).

The fee levels operators can charge are set by Germany’s Federal Network Agency (BnetzA) for a five-year period and currently stand at 9.05 percent for new grids and 7.14 percent for old ones.

These, however, will be slashed to 6.91 percent and 5.12 percent, respectively, based on BnetzA proposals, with the new rates to kick in from 2018 for gas grids and from 2019 for power networks.

“This might be partly offset through cost cuts and lower borrowing costs, but even then the business will remain stable and stable means stagnation,” Thomas Deser, senior fund manager at Union Investment, said.


Problems at its npower unit, one of the big six energy providers in Britain with 5.2 million customers, have been a major concern for Innogy investors.

Innogy has recently managed to stop a mass outflow of clients, caused by billing issues and competition from smaller peers, but investors do not see large growth rates in Innogy’s retail business with EBITDA margins of less than 3 percent.

“I think if they can manage to keep the customer numbers flat that would be an achievement. That’s also true for margins,” said Martijn Olthof, senior portfolio manager at Dutch APG Asset Management.

A turnaround at npower, which made an EBITDA loss of 65 million euros last year, is expected to keep EBITDA for Innogy’s group retail business at least stable in 2016.


With most European markets moving from a tariff-based reward system to a tender-based model for renewable energy, it will be harder to secure projects in the future, as success now depends on who makes the lowest bid for projects.

In Europe, more and more companies are trying to compete for a limited number of wind power projects, pitting traditional energy utilities against infrastructure funds looking to diversify their holdings.

“You’re moving from a subsidised industry to a market-based industry,” said Luca Bettonte, Chief Executive of Erg, Italy’s largest wind power producer. “Competition is going to be fiercer.”

Wind power, which accounts for 84 percent of Innogy’s renewable energy capacity and is the key driver in its renewable strategy, is particularly affected, squeezing internal rates of return of 9-11 percent for on- and offshore parks.

EBITDA at Innogy’s renewable division is expected to fall to 0.6-0.8 billion euros this year, from 0.8 billion in 2015. ($1 = 0.8907 euros)

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