RWE published estimates that up to 40’000 MW of coal-fired capacity (5% of total installed capacity) will have to be shut in continental Europe due to more stringent regulation. While old plants are shut, it becomes increasingly difficult to build new coal-fired power plants. In December alone, two major coal-fired projects in Germany were cancelled. EnBW announced the cancellation of the 900 MW Dörpen project and Danish utilty Dong shelved the construction of the 900 MW Greifswald plant. As a result, reliably available capacity is set to tighten going forward, which will have positive implications for power prices.
Meyer Burger and 3S agreed to merge in 2010. Meyer Burger is the world's leading wafer sawing equipment maker, while 3S is one of the frontrunners on module production equipment. As many of their customers are integrated from wafer to module production, there is a high product portfolio fit. In addition, CHF 20m synergies annually are expected.
The UN process failed to draw tangible results at the Copenhagen conference. Frustrated by the lack of progress, a group of leading emitters have drawn up their own “accord”. The agreement, which was signed by the USA, China and three other countries, allocates investments of USD 30 billion to deal with the effects of global warming by 2012.
The 9-month results from the large European power generators were reassuring. E.ON held its 9-month EBITDA flat compared to last year despite a steep drop in power demand and raised net income guidance for the full year. RWE felt the impact of the prolonged outage of its Biblis nuclear plant but confirmed prior full year guidance. GDF Suez’ EBITDA was as forecasted and the company continues to expect 2009 EBITDA to exceed last year’s. All three companies have more than 90% of their 2010 power production sold forward and are hence well protected from near-term power market weakness. Also, all three companies provide 6% dividend yields and the two German utilities trade at 9x visible 2010 earnings. CEZ, the largest generator in the Czech Republic reported a 7% increase in net income for the first 9 months. Key attractions of CEZ are a competitive, low-cost generation fleet, a strong balance sheet and solid 2010 hedging.
US President Barack Obama confirmed that he is likely to attend the Copenhagen Climate talks in December, and that he is prepared to bring a US commitment to cut domestic emissions by 17% from 2005 levels by 2020, in line with legislation being discussed in the US Congress. China’s State Council announced last week that China plans to reduce its CO2 emissions per unit of GDP by 40-45% by 2020 from 2005 levels. In addition, it was also confirmed that its prime minister would attend the climate summit.
Chinese portfolio companies Suntech Power, Trina Solar, Canadian Solar, Ja Solar and Yingli all reported better than expected 3Q numbers due to strong volume growth and improving margins. All companies gave positive outlook for Q4 and the first part of 2010. Solarworld also reported 3Q numbers that were worse than expected on all accounts: the company is increasingly suffering from the strong Asian competition.
Polysilicon and wafer companies are suffering from increasing price competition, leading to lower than expected net profit numbers at REC and MEMC. MEMC reported sales of USD 310 millions (+9.5% q/q) and an EPS loss of 0.29 USD due to restructuring charges. REC’s sales sank by 6% q/q to NOK 2.1 billion and an EPS loss of NOK 1.52 due to one-time effects.
EDP Renovaveis and Iberdrola Renovables reported good 3Q numbers with EBITDA growth of over 10%. The companies realized a strong increase in installed capacity that was partially offset by lower realized prices in Spain. Vestas delivered Q3 EBIT far above consensus estimates and reiterated 2009 guidance. The company is optimistic about 2010 and issued new guidance reflecting a 4% growth from current levels. Chinese wind turbine manufacturers Goldwind and Sinovel have both completed their research and development of large-scale wind turbines, and launched 2.5MW and 3.5MW turbines respectively.
In Germany, CDU and FDP party leaders finalized the coalition agreement. The agreement contains a clear commitment to prolong lifetimes of the existing nuclear generation stations. While the Government will claw back at least half of the financial benefit of such prolongation, the net effect will be a significant positive for both E.On and RWE. Belgium prolonged operating lives of three nuclear plants by 10 years during the month. This is an additional positive to the GdF Suez equity story, where merger synergies, margin improvement in the gas business and a recovery in power prices will drive earnings growth of 12% p.a. through 2013.
After the U.S. government issued guidelines for the application of cash grants in July, it approved already over USD 1 billion in grants for wind and solar power projects in September. Main beneficiaries of the program are European companies Iberdrola Renovables, EDP Renovaveis and E.On.
During the PV conference in Hamburg, Suntech announced a 16.5% module efficiency, beating all previous world records. It serves to highlight that some of the Chinese players are on the cutting edge of technology, which is the most important determinant in production costs.
The German election resulted in a center-right majority, which will lead to significant energy policy changes. The new government will prolong operating lives of Germany’s nuclear power plants beyond the 32 years, which were codified in 2002 in the Nuclear Power Regulations Act. The details of the prolongation will be sorted out over the coming months. Due to the prolongation of operating lives, E.On and RWE will enjoy higher operating cash flows and will have lower investment needs than under the nuclear phase-out scenario. RWE is the key near-term beneficiary, as its 1,167 MW Biblis A unit would otherwise have been shut down in 2010 already. Both German utilities remain core positions of the fund since they trade at discounted valuations (P/E on 2010 of 8.8x for RWE and 9.3x for E.On) and have strong operating leverage to the medium-term recovery in power prices. Both companies are also making headway in streamlining their asset portfolios.
Q2 EBIT margins of integrated players such as SolarWorld, Trina, REC and Canadian Solar were far stronger than the operating losses recorded at specialist cell makers Q-Cells & JA Solar and wafer producers LDK & ReneSola. Chinese solar companies reported Q2 numbers during August: All companies improved sales compared to the weak Q1, but further margin erosion due to declining module prices. In addition, companies became more prudent with respect the full year outlook. Q-Cells announced a restructuring program called Reloaded to achieve cost cutting. Q-Cells will permanently shut down production lines I to IV (360MW or one-third of capacity) laying off 500 workers and recording asset write-downs of EUR 100 million.
US Treasury and US Departement of Energy departments announced the initiation of the USD 2.3 billion tax credit program for manufacturers of clean energy equipment from the stimulus package. The program will provide developers of manufacturing plants with an investment tax credit of 30%. To qualify, manufacturers must produce equipment for solar energy, wind energy, or geothermal energy; fuel cells, microturbines or batteries.
RWE reported EBIT of EUR 4.1 billion (+4% yoy) and net income of EUR 2.2 billion (+5%). The company reitarated its medium-term target of growing net income by 10% to 2012. E.On’s adjusted EBIT was EUR 5.7 billion (-1%), while its adjusted net income grew by 7% to EUR 3.6 billion. The company also announced a restructuring plan aiming to deliver EUR 1.5 billion of cost cutting by 2011. E.On surprised the market with the early announcement of a buyer for its Thuega assets. The expected proceeds of EUR 2.9 billion were in line with market expectations and further strengthen E.On‘s balance sheet.
In addition to the roof-top solar program announced in June, the Chinese government introduced the “Golden Sun” solar program in July. Under the program, photovoltaic projects will receive a 50%-70% capital cost subsidy. The total program is limited to 680 MW on a national level. Further announcements regarding a feed-in tariff for large, utility-scale installations may be forthcoming in the near future.
Gamesa sold 824 MW of turbines in Q2 and reported a healthy 8% EBIT margin on solid cost management. The company confirmed its profit outlook for the year and expects the EBIT margin to expand to 11% by 2011. Gamesa received a 300 MW order from China, indicating that the company is establishing a foothold in a market so far dominated by local suppliers. Orders also continued to tick in at Vestas and the company is getting closer to meeting its 2009 guidance. Amongst other, Vestas got a 165 MW order for a Belgian off-shore project, which may be extended to 330 MW. EDP Renovaveis reported a rise in net profit by 32% for H1. The company added 1’455 MW during the last 12 months and now has 5’300 MW in operation making it the fourth largest wind operator in the world. Canadian utility TransAlta bid a 25% premium to take over wind developer Canadian Hydro.
Regulated U.S. utilities in the portfolio topped the market’s expectations for Q2. Wisconsin Energy grew earnings by 12% as new power plants entered into service. Northeast Utilities recorded 27% higher earnings as its electric transmission investments are starting to bear fruit. The company continues to see expansion opportunities and raised its investment forecast for 2009 by 25%. Transmission company ITC Holdings recorded a 7% growth in profit and raised its outlook driven by the need to integrate renewable energy sources into the transmission grid.
Profitability in the Japanese utility sector is about to recover. The cumulative operating profit of the 10 large electric utilities is expected to double next year on higher nuclear power generation volumes and markedly lower fuel costs.
The news flow on the Pennsylvania power auctions was positive: (1) Exelon’s power auction yielded a 15% higher price than expected. (2) The utility commission approved PPL’s long-term procurement plan for 2010-13. This implies that the utility will procure its power via a series of procurement auctions. This should pave the way for the implementation of market-based power rates in
Statistics released by the European Wind Energy Association in June show that 36% of all new electricity generating capacity built in the European Union was wind energy, exceeding all other technologies including gas, coal and nuclear power in 2008.
In Japan, Tokyo Electric Power (Tepco) made further progress on the restart of the Kariwa nuclear power station. The 1’356 MW unit 7 reached 50% of capacity during the month. Unit 6 (1’356 MW) is likely to be restarted during the coming two months. The plant restart will materially reduce Tepcos fuel and CO2 costs going forward.
The Waxman-Markey bill was cleared by the U.S. house committee. During discussions, the impact of the bill was watered from its original state and now plans to give away 85% of the emission allowances for free.
SolarWorld was one of the very few of the solar sector to actually grow Q1 revenues y-o-y (by 5%). Sales guidance of >EUR1 billion for 2009 was reiterated and inventory levels were down again by end-April. The company indicated that markets for SolarWorld are improving, similar to statements made by market leaders First Solar and SunPower.
Recent regulatory orders concerning U.S. utilities indicate that the framework remains supportive despite the current economic downturn. In Florida, the regulator approved a rate increase for the Tampa utility based on a 11.3% allowed ROE (vs. the current 10.3% average for U.S. utilities). Florida Power & Light (FPL) filed a request for a USD 1 billion electric base rate increase implying a 12.5% ROE. Despite the large increase, electric bills would fall by 5% in 2010 as the fall in gas prices more than offsets the increase in base rates. In California, regulators approved a 11.5% ROE for Edison International.
Gegenüber dem Vorjahr stieg das operative Ergebnis von E.ON im Jahr 2008 um 7%. Die Geschäftsleitung schlägt eine Erhöhung der Dividende auf EUR 1.50 pro Aktie vor (+9%). Dies entspricht einer Ausschüttungsquote von 50% und einer Dividendenrendite von 6.8%. Die Firma erwartet für das Jahr 2009 ein stabiles EBIT und 2010 eine Erhöhung um 10%. Diese Prognose basiert auf den Rohstoffpreisen von mitte März und beinhaltet eine 4%ige Reduktion des EBIT aufgrund der aktuellen Wirtschaftsschwäche. Da E.ON bereits 90% ihrer 2010er Produktion sowie 50% ihrer 2011er Produktion verkauft hat, ist dies eine konservative Einschätzung mit Upsidepotential. Andere grosse Europäische Versorger wie GdF Suez und RWE betreiben ähnliches Risikomanagement und verfügen ebenfalls über eine hohe Dividendenrendite. Diese Firmen profitieren stark von mittelfristig steigenden Strompreisen.
In the U.S., PG&E provided reassuring messages on the growth prospects of its California utility operations. Investments in grid infrastructure and renewable energies should fuel 8% growth p.a. through 2011. The regulatory mechanisms in place fully protect the company against falling power usage. Northeast Utilities enjoys similar regulatory treatment and also benefits from strong growth in power transmission. The company grew 2008 earnings by 17% and raised the dividend by 12%. Wisconsin Energy also continues to deliver: Earnings were up 7% and the dividend was raised by 25%.
With the acquisition of Essent for EUR 9.3 billion, RWE achieved its goal to establish a significant market presence in the Dutch market. Essent fits well with RWE’s generation portfolio and adds a 3’000 MW wind power development pipeline to the group. Given its strong balance sheet, a 6% yield and little power price exposure in 2009 and 2010, RWE remains a key holding of the fund.