November 11, 2016 / 6:31 AM / 3 years ago

Innogy profit fall spells more trouble for RWE

FRANKFURT (Reuters) - Germany’s Innogy (IGY.DE) reported a 7 percent fall in core profit on Friday, hitting the power utility’s shares and those of struggling parent RWE (RWEG.DE).

Innogy’s performance represents a significant blow for RWE, which is grappling with debt of more than 28 billion euros (23.72 billion pound) and last month listed a minority stake in the business on which it relies for stable returns.

Shares in Innogy were down 3.9 percent at 31.49 euros by 1238 GMT. RWE, meanwhile, declined 1.5 percent to 12.49 euros, the third-biggest faller on Frankfurt's benchmark DAX .GDAXI index.

The shares are also coming under pressure from growing expectations of higher interest rates.

With markets now betting on a rise in global inflation after Donald Trump’s victory in the U.S. presidential election, the low but stable returns offered by utilities that have a large proportion of regulated assets will lose their appeal to investors.

“We have seen a sell-off at utility shares that have lot of regulated business,” Innogy Chief Financial Officer Bernhard Guenther said on Friday, pointing to British peer National Grid (NG.L), the shares of which fell sharply this week.

“This is due to fears that interest rates will rise again.”

About two thirds of profits at Innogy, Germany’s largest energy group, come from regulated gas and power grids, which offer mid-single-digit percentage returns that eclipse current interest rates close to zero percent.

HEAVY EXPENDITURE

Networks also require heavy expenditure on technology and efficiency upgrades to cope with more renewable energy in the wake of Germany’s energy shift away from fossil fuels.

Innogy said that nine-month core profit (EBITDA) fell to 2.92 billion euros ($3.18 billion), partly because of a 3 percent rise in network investments to 656 million euros, about 60 percent of its total capital expenditure.

Between 2016 and 2018, grids will swallow 4.1 billion euros of Innogy’s investments, nearly two thirds of the total.

Last month’s initial public offering (IPO), spinning off Innogy’s networks, retail and renewables units, was designed to ease pressure on RWE’s stretched balance sheet and to benefit from Innogy’s stable dividend.

RWE’s reliance on Innogy, in which it retained a 76.8 percent stake, stems largely from the struggles of core power generation operations, which have come under intense pressure from renewables and a steep decline in wholesale prices.

However, since listing on Oct. 7, Innogy stock has dropped by 14 percent, with analysts citing falling returns on its grids, competition in renewables and low margins at its retail unit.

The company has pledged to pay out 70-80 percent of adjusted net income for dividends, which would mean a payout of 1.39-1.58 euros per share, based on its forecast for 2016 adjusted net income of about 1.1 billion euros.

Additional reporting by Hakan Ersen and Vera Eckert; Editing by David Goodman

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