Hottest Returns on DAX Generated by Old-School Coal Burners

Last year, investors jumped at the chance to buy into Germany’s landmark shift into renewable energy. Now they’re getting a lesson that fossil-fuel utilities still have plenty to give.

RWE AG, Europe’s biggest coal plant operator and greenhouse-gas polluter, is the biggest gainer on the nation’s DAX index after jumping 49 percent this year. The advance is almost six times that of its clean-energy subsidiary Innogy SE. Another company for which coal and gas are its most important fuels, Uniper SE, has climbed at more than double the pace of its former parent EON SE.

A rebound in power prices from decade lows, climbing coal-plant profitability and the need for stable supplies as Germany exits nuclear power have focused investor attention on conventional generators. While solar and wind take a growing share of Germany’s power generation, coal, the dirtiest fuel, still makes up 40 percent of its energy mix.

“Old economy utilities RWE and Uniper were extremely undervalued,” said Herbert Perus, head of equities at Raiffeisen Kapitalanlage GmbH in Vienna. “Last year, prospects looked poor as far as one could see. Now commodity prices are in recovery mode.”

RWE rose 0.3 percent to 17.58 euros at 4:24 p.m. in Frankfurt. Uniper climbed as much as 1.5 percent to a record 16.80 euros.

Essen-based RWE has 14 buy recommendations from 30 analysts tracking the utility, with only three saying investors should sell. Uniper has nine analysts calling the stock a buy, 2 say sell and 13 say it’s a hold, including Adam Dickens at HSBC Holdings Plc who upgraded his rating from reduce on Tuesday.

RWE, Uniper, EON and Innogy all declined to comment on their share price performance.

RWE and Uniper have benefited most from last year’s utility market overhaul, a response to Chancellor Angela Merkel’s transition to an economy built on green energy. RWE listed Innogy, its grid, renewables and retail arm, in October in Europe’s largest initial public offering since 2011. Uniper started trading in September after being spun off from EON.

Price Rebound

German wholesale electricity prices have rebounded 50 percent from last year’s lows. RWE and Uniper are more exposed to volatile commodity markets than EON and Innogy, which get most of their earnings from regulated businesses such as grids and retail markets.

Dividend prospects have also set RWE and Uniper apart. Shareholder payments from the two are expected to increase by more than 20 percent a year on average through 2020, compared with 4 to 7 percent for Innogy and EON, according to RBC Europe Ltd.

Last year’s breakup was also good for RWE. Its sale of 13 percent in Innogy raised 2.64 billion euros ($2.95 billion), providing the company dating back more than a century with much-needed cash and a majority stake in Germany’s largest utility by market value. EON had to write down billions of euros in the value of conventional generation assets as part of its Uniper spinoff.


“The quite genius move of listing Innogy separately allowed RWE to raise equity at a very good price, managing to solve its balance sheet problems,” said Per Lekander, a fund manager at Lansdowne Partners in London. “Any movement in Innogy is leveraged on RWE.”

Coal has been the cornerstone of Germany’s economy since the 19th century and played a key role in its post-Second World War industrial resurgence. Uniper’s and RWE’s oldest plants fed by the mineral are still in operation after about half a century.

While utilities across Europe are closing or converting mainly older coal-burning generators, some conventional power may still be needed to smooth fluctuations in intermittent renewables. On top of that, demand may increase as Germany shutters its remaining eight nuclear reactors under the nation’s exit from atomic power by 2022.

Investors “have realized that security of supply is becoming an increasingly important issue,” said Wolfgang Schaefer, a director at Verband der kommunalen RWE-Aktionaere Westfalen GmbH, a municipal shareholder association.

Burning fossil fuels is also becoming more profitable, despite efforts from lawmakers to punish such power production. The clean-dark spread, which measures the profitability of producing power from coal, has jumped fourfold since March when it fell to the lowest since at least 2009. A similar measure for gas generators is near the highest this year.

“The market has become more optimistic on the business models of RWE and Uniper,” said Ahmed Farman, a utilities analyst at Jefferies International Ltd. “They have a role to play.”

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