RWE Says Profit Rose 60 Percent on Higher Power Prices, Increases Forecast

By Thom Rose and Peter Dinkloh

November 9, 2006

Nov. 9 (Bloomberg) -- RWE AG, Germany's second-largest utility, posted third-quarter profit that rose more than expected because of higher power prices and said 2006 net income will top previous forecasts.

Net income climbed to 433 million euros ($553 million), or 77 cents a share, from 270 million euros, or 48 cents, in the year-earlier period, the Essen, Germany-based company said today. The shares climbed by the most in almost three months.

RWE's performance may increase the pressure on Chief Executive Officer Harry Roels to buy power producers with some of the 14 billion euros he earned selling assets including Thames Water. European utility takeovers have surged 33 percent this year to about $205.5 billion and E.ON AG is seeking to buy Spain's Endesa SA for 37.1 billion euros.

``The clock is ticking for acquisitions,'' said Per-Ola Hellgren, an analyst at Landesbank Rheinland-Pfalz with an ``outperform'' rating on RWE shares. ``They can't sit on their laurels forever, they are going to have to move or be moved.''

RWE shares rose as much as 2.42 euros cents, or 3.1 percent, to 80.01 euros. The stock was up 2.7 percent at 79.43 euros by 1:15 p.m. in Frankfurt, heading for its biggest gain since Aug. 15. RWE stock has advanced 27 percent this year, pushing the company's market value to 44.3 billion euros and outpacing larger competitor E.ON AG's 6.2 percent increase.

Sale Boosting Profit

The sale Thames Water for 4.8 billion pounds ($9.1 billion) may help RWE boost full-year net income by more than 40 percent, four times faster than earlier forecast, the company said today.

German electricity prices advanced 24 percent in the quarter as hotter-than-average summer temperatures increased demand for air conditioning. RWE's profit was expected to be 371 million euros, according to the median estimate of 10 analysts surveyed by Bloomberg.

``The numbers were a bit better than expected,'' said Martin Mueller, who manages more than 100 million euros for WGZ Bank in Luxembourg, including shares of RWE. ``At this point the future is more important than the past though: What is RWE going to buy and how much are they going to pay?''

Roels last month said RWE expects a book gain of 700 million euros from the sale of the Thames Water unit. RWE expects to complete the sale to a group led by Australia's Macquarie Bank Ltd. in December.

Power Focus

RWE sold Thames Water as Roels, 58, unravels a plan by former CEO Dietmar Kuhnt that transformed the utility into the world's third-largest water company. RWE plans to invest the gain from Thames in gas or power companies in eastern Europe as markets there open to competition next year.

American Water Works Inc., the other water supplier RWE wants to sell, will probably have an initial public offering next year, RWE Chief Financial Officer Klaus Sturany said Oct. 23.

The sale of the Thames-Water unit will give RWE a cash position of 3 billion euros by the end of the year, eliminating the company's debt completely, it said today. CEO Roels said in August that he plans to return the money to investors if he can't find ways to invest it.

``We would like to grow with acquisitions, but prices are often exaggerated,'' CFO Sturany said today on a conference call. ``We won't do a mega-deal in the foreseeable future, and that is for price reasons.''

Third-quarter profit before interest, taxes and one-time effects, or operating profit, gained 4.7 percent to 1.26 billion euros, beating analysts' estimate of 1.24 billion euros. RWE reiterated its expectation that full-year operating profit will grow by between 5 percent and 10 percent.

RWE spokeswoman Barbara Woydtke declined to confirm the quarterly operating profit figure, which Bloomberg calculated by subtracting half-year figures from nine-month results published by the company today.

Power Prices

Third-quarter revenue rose 12 percent to 9.39 billion euros, more than the 9.32 billion euros estimated by analysts.

Electricity prices in Germany and in the U.K., where RWE controls NPower, climbed in the third quarter as July temperatures in Frankfurt reached at least 31 degrees Celsius (88 degrees Fahrenheit), 12 degrees warmer than normal, according to Meteorlogix LLC. Power was cut to parts of London in July by EDF Energy Plc, which supplies about a quarter of Britain's power needs, amid soaring temperatures.

``Demand for energy in our core European markets was marked by extreme temperatures,'' RWE said today on its Web site. ``In July the effects of heat and dryness on power generation led to massive price gains.''

German Regulator

RWE and E.ON, Germany's largest utility, may garner less profit from their German electricity businesses in coming months as the Federal Network Agency forces them to reduce the amount they charge other suppliers to use their power grids.

E.ON, the world's largest power company, yesterday reported an unexpected third-quarter loss after German regulators forced the utility to lower grid fees.

The regulator rejected about 10 percent of what RWE billed rivals, according to analysts at Credit Suisse Group, including Christopher Kuplent. The company said it will cut prices to comply with the rules, and wouldn't rule out taking regulators to court over their rulings.

Holders of RWE's 1.2 billion euros of 5.125 percent bonds maturing in 2018 demanded a 0.44 percent premium on Nov. 1, compared with 0.4 percent a year earlier, according to Bondtrader Composite Prices compiled by Bloomberg.