Innogy: where RWE going?

A nice piece of business. RWE’s decision to separate its grids and renewables business from traditional generation has left it €3bn better off, and given it a 75 per cent stake in Germany’s most valuable utility. The question now is what becomes of the parent, whose debt is rated just above junk status.

On Friday, shares in Innogy (reprising the name of a British company that RWE bought in 2002) closed at their IPO price of €36, giving the carved-out company an enterprise value of €40.7bn, more than nine times its forecast 2016 earnings before interest, tax, depreciation and amortisation. That is the highest multiple of any of the four German utilities.

The demand for Innogy shares is unsurprising. The company gets three-fifths of its ebitda from running power grids, where returns tend to be regulated and often inflation-linked rather than dictated by the volatility of commodity prices. Another 20 per cent comes from renewables, a growth area. Unlike rival Eon, which also owns grids and renewable generation assets, Innogy is not carrying the can for nuclear decommissioning and storage costs. Its ability to raise capital is no longer constrained by the stretched balance sheet of its parent.

For RWE, carving out Innogy was mostly about shoring up its finances: it raised about €3bn from the share issue. Its prognosis for the remaining group is downbeat, though: there was no dividend on the ordinary shares this year, and it is predicating full-year operating results “significantly below 2015” in four of its five business divisions.

Uniper, the spun off vehicle for Eon’s conventional generation business, has so far told a more optimistic post-split story involving cash returns, recovery in Russia and growth in profits from “capacity mechanisms” where utilities are paid for a certain amount of spare capacity.

RWE has done a fine job with Innogy; now it needs to think about its own investment case.

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