Growth Generator: Rolf Pohlig, RWE

RWE opened its first power station in Essen in 1900 and is now Germany’s largest electricity generator. Through its fully consolidated investments, the company supplies electricity to more than 16 million customers and gas to nearly eight million.

In his three years as CFO, Rolf Pohlig has led an aggressive mergers and acquisition strategy that has taken the company to the size it is now. But it has not been growth at any cost. Pohlig has said no to deals when many would have expected him to say yes, and he has been careful to balance out the costs of any acquisitions by disposing of unwanted or less profitable assets.

Already present in ten European countries and ranked number five in the European energy market with investments of more than €30bn, RWE looked to Russia, where Italy’s Enel, Finland’s Fortum and Germany’s E.ON had all made acquisitions. But in September 2008, RWE decided not to buy a stake in Russian regional generator TGK-2, citing inter alia uncertain value from the opportunity and the unstable domestic financial climate.

Then only three months later, Essent, the largest Dutch utility that also has wholesale and retail customers in Belgium, announced it had agreed to be taken over by RWE in a €9.3bn all-cash deal. This included the assumption of €1bn of debt, which meant the German firm was paying a multiple of almost ten times Essent’s expected 2009 EBITDA.

A company close to home had clear attractions. Pohlig says: "You cannot compare the situation of an incumbent player in the Benelux, right next door to our own operations, with an opportunity in a new market like Russia, in another part of the world."

As to the multiple RWE paid for Essent, Pohlig retorts: "I think multiples not only reflect the results of last year but they also reflect the growth potential of the next several years. We told the markets that our expectation is that the earnings growth of Essent will be 10% a year until 2012 and you have to take that into account when evaluating the multiple." In the next five years, RWE is looking, via synergies, to drive €100 million a year of costs out of the combined businesses.

Pohlig points out that one important element in winning this value is that many of the senior executives involved in negotiations and due diligence are the same people who are now overseeing the integration of the operations.

After EU competition authorities approved the Essent deal in June, the acquisition was finally concluded last September. Two weeks later, RWE was walking away from another potential acquisition, the chance to bid for a 67% stake with a book value of €1.5 billion in Polish state-owned energy company Enea, in which Vattenfall of Sweden has a minority stake.

Even though analysts rated the Polish utility as a good fit, RWE said that it did not think it could offer enough to meet market expectations. It did not rule out a later offer. That opportunity, however, may not though arise. GDF Suez immediately asked for access to the Enea data room.

Unlike Enel, RWE has not been willing to pile on debt to buy up rivals. Indeed it has been seeking to dispose of some assets, no longer seen as core.

Thus Thames Water was sold for a transaction value of roughly €12bn to private equity in 2006 and, since 2007, RWE has been trying to get rid of American Water Works, where a forced €429m write-down drove RWE to a fourth quarter loss in 2007. Complex regulatory hurdles delayed plans to divest American Water via an IPO which was then stymied by the global financial crisis. The offer of a minority stake in April 2008 only raised $1.3bn and left RWE with 60% of the stock, which was finally sold during the course of 2009 for $1.9 million. American Water had cost RWE $4.6bn in 2003.

To comply with German and EU competition rules, RWE is in the process of disposing of its German gas transmission business and has sold Stadtwerke Bremen, which it acquired as part of the Essent acquisition.

Capex on fixed assets in the years 2009-2012, says Pohlig, will be €26bn, half of which is going to be spent outside of Germany. In addition the group will have approximately €4bn in the Netherlands and Belgium from the newly acquired Essent group. RWE is also one of the six equal shareholders in the Nabucco pipeline, which will bring gas from the FSU countries to Europe via Turkey and the Balkans. Signing the Inter-Governmental Agreement (IGA) in July which guarantees stable legal framework for the gas transit was an important milestone in this project aiming to the goal to diversify Europe’s gas sources.

RWE’s forward power sales have gone well, says Pohlig. "We are almost sold out for 2010 and for 2011 we have already sold two thirds of our expected output. For 2012, the figure is almost a third of output." The average achieved price is at least €60 per megawatt hour with 2012 base load forward prices currently trading nearer €55.

Much less clear is going to be the impact of carbon credits on RWE’s bottom line. "Our assumption is that starting in 2013 we will have to buy an additional 100 million certificates per year. That compares to the fact that we are already buyers of 60 to 70 million certificates per year." These credits cost the company some €1bn in 2008.

In the face of this significant increase in carbon credit requirement, says Pohlig, RWE is driving a major CO2 mitigation programme that includes new-build power stations to replace older, more polluting facilities, the life time extension of nuclear stations and investment in renewables. RWE is also, he says, deeply committed to the UN’s JI/CDM programme for Third World projects, which earn European emitters credits.

By 2015 we expect that we can reduce our CO2 exposure by roughly one third compared to 2006. An additional efficiency enhancement programme should also be bringing in savings of €1.2bn by 2012, compared to 2006." RWE has some €16.4bn of capital market debt in its medium-term note programme: "I think that over the last 11 or 12 months, the bond markets have improved dramatically. We were one of those who opened the market in November 2008 and we made use of the market in the first half of 2009, to refinance the Essent acquisition."

The Bonds issued in February were four times over-subscribed: €2bn was six year paper and €1bn with the maturity of 12-and-a-half-years.

Pohlig followed up this February issue with a June deal for €1.5bn, also oversubscribed with a two and a quarter year tenure. Pohlig says RWE has worked hard on its overall maturity profile. "Our general policy is to level it out. So far we have had some relatively short maturities of two years with 30 years issues also in there at the other end. Our strategy has been to level the profile so that in any given year we will not have maturities of more than €2bn. As a result," adds Pohlig with a smile, "I believe that my successors in this job should not have a problem refinancing whenever it is necessary."

Besides the bond market RWE has a fully committed but uncalled €4bn syndicated loan for liquidity back-up and refinancing and a $5 billion commercial paper programme, up to one year, of which currently only some $1.1bn has been drawn down.

After the bonds, the most important debt market for us is our commercial paper programme. The commercial paper market works perfectly right now and there are a lot of opportunities in the shorter market. However for the long-term investments that are typical of our industry these must ideally be reflected also in long-term financing."

RWE management also won the right at its 2009 AGM to increase capital by up to 20%. Pohlig plays down the significance of the move, saying nothing was planned and that under German regulations such shareholder authorisations are valid for five years: "We simply wanted to complete our tool box of various instruments to raise capital. This is the reason. So it’s not an increase of capital which was decided at the AGM but it was an authorisation by the shareholders for management to make use of such authorisation in case there’s a need for such equity placement."

Pohlig embraces RWE’s unusual investor ethic. "It is the personal responsibility of every board member, particularly the CEO and CFO, to be available to investors. I personally am on roadshows each and every year, seeing investors and analysts where they are, or bringing them here to Essen."

He regrets the short-termism that generally drives equity markets: "I think utility investors have a much longer term view. I think a lot of people outside our industry would be surprised to see how long-term the view of these investors is. They are concerned about the CO2 framework beyond 2012 and what will be the status of security of supply in Germany, or throughout the continent, by the end of the next decade. These are the topics our investors have in mind and for them they are much more important than next quarter’s earnings. That may be different to other industries."