innogy is rigorously implementing its strategy for sustainable growth. Just a few weeks after presenting its redefined 4P strategy (Performance, Portfolio, Position and Partnership), innogy announced last week a strong new partnership on the UK retail market together with SSE (see press release of 8 November 2017). In addition, innogy SE is today publishing solid figures for the first nine months of fiscal 2017.
As expected, innogy increased its result in the first nine months of 2017: adjusted EBITDA was about EUR 3.1 billion. Net of operating depreciation and amortisation, innogy posted adjusted EBIT of about EUR 2.0 billion. These figures are up 5 and 9 per cent, respectively, year on year. Adjusted net income was up as much as 27 per cent, to EUR 850 million. Besides the positive development in the operating earnings, the significant improvement in the adjusted financial result came to bear here in particular.
"We have set ourselves ambitious goals with our growth strategy. And we are pulling out all the stops to secure and expand our competitive position. The past nine months show that our earnings position has continued to show robust development. And we are making good progress, also in the UK. Despite the difficult situation on the UK market, npower is a strong part of the planned combined retail company with SSE.”
Bernhard Günther, CFO of innogy SE
With its acquisition of Belectric at the beginning of the year, innogy announced a major success in the area of solar energy. This was followed in September by a record-setting commitment from the Federal Ministry of Transport and Digital Infrastructure (BMVI) to subsidise 1,245 new charging stations, which will strengthen innogy’s position as a leading operator of charging infrastructure for electric mobility in Germany. A further milestone was the winning of a tender for the Triton Knoll wind farm project, off the English east coast: innogy is now the sole owner of this highly attractive renewable energy project. The wind farm has a planned installed generating capacity of 860 megawatts and will be able to supply the equivalent of an expected minimum of 800,000 UK households p.a. with renewable electricity.
The capital market is acknowledging these achievements, innogy CFO Günther observes: “The issuance of our first senior bond with a volume of EUR 750 million in April represented an important step on the way to financial independence for innogy; as did setting up our stand-alone credit line as a liquidity reserve. The capital market appreciates our financial independence. Shortly afterwards, Standard & Poor’s upgraded our rating to BBB. That will certainly have helped when we issued our green bond in October. Germany’s first benchmark-sized corporate green bond was several times oversubscribed.”
As at 30 September 2017, innogy employed 42,224 people (converted to full-time positions). They generated external revenue of around EUR 30.8 billion, which was down about 2 per cent year on year.
For the full year, innogy expects adjusted net income to total over EUR 1.2 billion. The Executive Board is still applying a payout ratio of 70 to 80 per cent as the basis for the dividend.
Positive development of earnings in grid business in particular
The grid business was the main driver of the earnings growth achieved in the first nine months of 2017. Adjusted EBIT for the Grid & Infrastructure division increased by 19 per cent, to EUR 1,424 million. This was influenced mainly by lower expenses for operating and maintaining innogy’s grids in Germany. In addition, in the first quarter of 2016, provisions had been accrued in this segment for partial retirement measures. In Eastern Europe, cooler weather conditions compared to last year’s corresponding period, among other things, had a positive impact on earnings as well. They drove up volume on the gas distribution networks, especially in the Czech Republic.
Adjusted EBIT for the Renewables division was down 20 per cent to EUR 194 million. This was mainly due to below-average wind and precipitation levels during the first nine months of the year. In addition, positive one-off effects in the previous year did not recur. The depreciation of the British compared to the euro also had a negative impact. A positive effect by contrast was felt from the commissioning of new onshore wind farms.
At EUR 570 million, adjusted EBIT in the Retail division was up 4 per cent year on year: while efficiency-enhancing measures and cost reductions had a particularly positive effect on earnings in the Retail Germany segment, reduced customer numbers and declines in sales in the Retail Netherlands/Belgium segment were evident in the year-on-year comparison. This was compensated for by curbing costs and applying efficiency-enhancing measures. The Retail business in Eastern Europe benefited from the cooler weather in the Czech Republic in particular, which improved earnings compared with the previous year. There was a decline in earnings in the Retail United Kingdom segment: the restructuring programme initiated at the beginning of 2016 led to a reduction in the cost base in the first nine months of 2017; however, the competitive landscape in the UK retail business remains very tough and pressure on margins is very high. The UK government has initiated recently the legislative process to introduce a general price cap for standard variable tariffs and is proposing an expansion of the existing price cap for vulnerable households.
As part of the annual impairment test, a goodwill impairment of EUR 480 million for the UK retail business was recognised. This impairment reflects the deterioration in commercial assumptions and tougher regulatory conditions. The planned merger of the retail activities of innogy and SSE in Great Britain did not lead to a different assessment of the impairment.
Electricity sales volume up 8.1 per cent, gas supply volume down 4.1 per cent year on year
In the first nine months of 2017, innogy sold 193.1 billion kWh of electricity to external customers, 8.1 per cent more than in the same period last year. This was mainly the result of winning new customers in business with German distributors as well as supplying more electricity to existing customers. Conversely, in the United Kingdom and the Netherlands/Belgium, innogy lost residential and small commercial customers to the competition.
Gas sales declined by 4.1 per cent to 153.1 billion kWh: this was predominantly due to a decrease in gas sales to residential and commercial customers.
Capital expenditure up 12 per cent
innogy’s capital expenditure in the first nine months of 2017 rose by 12 per cent to EUR 1,244 million year on year. This was mainly due to the acquisition of the international solar and battery specialist Belectric. The expansion and modernisation of its grid infrastructure continue to be a focal point of the company’s investing activity. Along with maintenance, the focus is on the connection of decentralised generation assets and network expansion in relation to the energy transition. Furthermore, innogy spent capital on various onshore wind projects in the United Kingdom and Germany. Additional capital was also invested in the expansion of broadband activities.
Net debt at EUR 16.0 billion
As at 30 September 2017, innogy’s net debt totalled EUR 16.0 billion, representing an increase of around EUR 0.2 billion compared to 31 December 2016. Net financial debt rose by EUR 0.8 billion as of 30 September 2017, as the operating cash flows did not cover the capital expenditure and dividend payments. This effect is mitigated by the decline in provisions for pensions from EUR 3.9 billion to EUR 3.4 billion. The main reason for this was the change in market interest levels, which is also reflected in innogy’s discount rates.
Standard & Poor’s (S&P) raises innogy’s rating
Rating agency S&P has reassessed innogy SE’s creditworthiness and upgraded the rating for the long-term liabilities and senior bonds of innogy SE from BBB- with a positive outlook to BBB with a stable outlook. With this upgrade, S&P has recognised the financial independence of innogy, which has been given a solid investment grade rating by all three of the major rating agencies.
Headcount up slightly
As at 30 September 2017, innogy employed 42,224 people (converted to full-time positions), a net increase of 1,600 compared to 31 December 2016. The rise primarily stemmed from personnel transfers from the German locations of RWE companies to the innogy Group as part of the reorganisation of the entire RWE Group. These processes have now been largely completed. The acquisition of Belectric also increased the headcount by approximately 550.
innogy maintains the outlook for this year’s business performance, which was first published on 13 March 2017 and confirmed on 12 May and 11 August. It anticipates that the innogy Group will achieve about EUR 4.4 billion in adjusted EBITDA and about EUR 2.9 billion in adjusted EBIT. From today’s perspective, adjusted net income is expected to total over EUR 1.2 billion.
Nevertheless, there are still some uncertainties in relation to innogy’s UK retail business in particular. The difficult market conditions and political pressure have intensified over the course of the year. Measures to reduce costs within the scope of innogy’s restructuring programme will help it to partially offset negative market effects, but it does not expect this segment to generate positive adjusted EBIT in 2017. Overall, in the Retail division, innogy intends to counter this with additional efficiency measures and therefore currently maintains its outlook. It remains to be seen, however, how the competitive situation will develop in the United Kingdom in the coming weeks. In the current regulatory environment, it appears unlikely that higher procurement and run-up costs can be passed on to customers.
In the Renewables division, innogy intends to continue expanding its capacities. The offshore project Nordsee One (near the island of Juist, Germany) will be fully commissioned in the fourth quarter and generating green electricity at its full capacity. innogy will also be connecting more and more turbines from the Galloper offshore wind farm (situated near the coast of Suffolk, England) to the grid. The negative foreign exchange trend in the United Kingdom and the non-recurrence of positive one-off effects felt last year will have an opposing impact. Moreover, below-average wind and precipitation volumes in the first nine months will have a detrimental effect. innogy is able to confirm its outlook because it will record a positive effect of EUR 46 million in the fourth quarter from the revaluation of its shares in the Triton Knoll offshore project. This revaluation is prompted by the acquisition of Statkraft’s 50 per cent stake in the project.
In the Grid & Infrastructure division, the development will mainly be characterised by lower costs incurred to operate and maintain innogy's grids. Furthermore, innogy accrued provisions for partial retirement measures last year.
In the Renewables division, the commissioning of new capacity will have a positive effect. The negative foreign exchange trend in the United Kingdom and the non-recurrence of positive one-off effects felt last year will have an opposing impact. The division will therefore probably close fiscal 2017 slightly down year on year.
In the Grid & Infrastructure division, the development of the result will mainly be characterised by the positive effect of lower costs incurred to maintain and operate innogy’s grids. Furthermore, provisions were accrued last year for partial retirement measures. An increase in the result is expected as a consequence.
The situation in the UK retail business remains very tense due to the fierce competition and political pressure. Measures to reduce costs within the scope of the restructuring programme will help to partially offset negative market effects. However, the Retail United Kingdom segment is not expected to generate positive adjusted EBIT in 2017. Overall, in the Retail division, innogy intends to counter this with additional efficiency measures and therefore currently maintains its outlook. The forecast does not take account of potential further regulatory intervention in the UK retail business, for example by way of a price cap on standard variable tariffs.
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