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RWE's Multi-Utility Strategy Starts to Bear Fruit

RWE's focus on a multi-utility strategy appears to be paying off. RWE revealed plans to launch a bond issue program in the near future to fund some of the recent acquisitions it has made in support of this strategy.


RWE relies on four pillars: gas, power, water and environmental services

German utility RWE on Tuesday announced rump-year results that showed its focus on a multi-utility strategy to be paying off, and said it plans to launch a new program of bond issues in order to raise some of the financing needed for the recent acquisitions it has made in support of this strategy. RWE's chief financial officer, Klaus Sturany, said the group would be issuing the first tranche of the bond program in the near future.

Since summer 2001, RWE has carried out acquisitions worth a total 22 billion euro, primarily of U.S. water utility American Water Works, Czech gas supplier Transgas, and U.K. gas and power supplier Innogy but also some small strategic stakes in German municipal power distributors.

Of the total consideration of 22 billion euro, 8 billion euro took the form of assumed debts, leaving the group with 14 billion euro to find. As a result of its acquisitions, RWE's net financing position (liquid funds minus short-term liabilities) has deteriorated over the past eighteen months from plus 15 billion euro to minus 1 billion.

But Chief Executive Dietmar Kuhnt pointed out on Tuesday that the group still enjoys a strong A rating from the international agencies. In his view, one of the decisive factors that have secured the group this rating has been its "well balanced, cash flow-strong core business portfolio".

Kuhnt stressed that RWE would now be giving priority to the task of integrating the new businesses into the group rather than acquiring new ones, though it would not rule out acquisitions altogether, particularly if they increased the group's position in central/eastern Europe and the United States.

RWE is currently sharpening its focus on its multi-utility strategy, with four pillars of gas, power, water and environmental services. As part of this process, the group said it plans to sell its financial interests in constructor Hochtief and Heidelberger Druckmaschinen, the world's largest producer of printing machinery.

CFO Sturany on Tuesday estimated the combined value of the two stakes at 4–5 billions, though analysts consider that it will be difficult to sell Hochtief, owing to the current crisis on Germany's construction market.

The group on Tuesday announced results for its truncated July-December 2001 business year, as it switches from fiscal-year to calendar-year reporting. These suggested that the focus on its core business is beginning to pay off, whereas its arch-rival, E.On AG, last week reported results that showed non-core activities such as chemicals still making a considerable contribution to its earnings growth.

RWE's operating profits for the shortened year came in at 2.03 billion euro, up 21% on the figure obtained in the July-December 2000 period. Core businesses contributed 85% of the operating earnings, according to Kuhnt.

For full-year 2002, RWE is expecting operating earnings to come in at 4 billion euro, an increase on the figure obtained in the 12 months ending 31 December 2001.

Kuhnt said the core businesses would account for 85–90% of the operating earnings. In power, following a 5.7% increase in prices charged to private consumers on the German market, operating earnings are expected to grow by a double-digit percentage.

Operating profits are also seen growing in RWE's water business, but declining slightly in its gas business.

Kuhnt said RWE's recent acquisitions had enabled it to overtake its competitors, and observers were in no doubt that by 'competitors' he meant E.On.

In power, RWE is now, according to its own estimates, Germany's number one and Europe's number three behind France's EdF and Italy's Enel, both of them state-owned.

In gas, it sees itself as Germany's number two and Europe's number five.

In water, only the two French giants, Vivendi and Suez, are better positioned globally.

In waste management, RWE sees itself as Germany's leader and Europe's number three.

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