RWE sees profits slip as sell-offs, market changes, erode Czech market position

29-04-2015

Gas giant RWE does not cut the same sort of figure it used to on the Czech market and its latest earnings figures represent a disappointment. But the biggest gas importer and seller is still strategically important for the country.

Photo: Tomáš AdamecPhoto: Tomáš Adamec The energy to lead is RWE’s slogan for the Czech market but the unit of the German power company RWE is not the player and does not have the traction it once had locally just a few years ago. The strategy of the mother company and more general trends are behind this erosion in market presence, influence, and profits.

First of all, RWE has divested parts of its Czech business, notably the main gas pipeline business NET4GAS which was sold off in 2013 to the investment group partnership of Allianz and Borealis. In a separate move, the Australian investment group Macquarie and allied funds at the start of this year boosted its stake in parts of RWE’s local Czech gas distribution network from 15 percent to just under 50 percent.

And as part of a wider liberalisation trend, RWE’s share of gas sales to Czechs has slipped from around 70 percent a decade ago to less than 45 percent as new entrants enter the field and grab a slice of the market.

And a second more general trend has also undercut its local performance. Gas sales are a seasonal business with most demand coming in winter. As a result companies traditionally used to fill up storage capacity in the summer and autumn months and draw on those reserves to meet the extra demand over the winter.

Reflecting the global trend to just in time delivery across the board, the gas market has moved on and a much greater proportion of demand in now met from more immediate purchases on spot markets and not from storage. It a more profitable but also a more high risk model with less cushion for the unexpected and things going awry.

RWE announced its local earnings figures for 2014 on April 29 with the net profit slipping by around a third to 7.4 billion crowns and total turnover down almost 20 percent at 43.4 billion crowns. Exceptionally hot weather was one factor hitting the results but the more general trends also came into play as well.

A breakdown of the final figures by the company blames the weather for around half of the 3.1 billion net profit drop in 2014. But most of the other half though comes from the lower earnings from storing gas.

RWE is by far the dominant gas storage company in the Czech Republic with around 2.7 billion cubic metres of gas at six sites able to cover about two months of the country’s needs in the depths of winter. The ongoing weakness of gas storage margins means that the company will continue its brake on adding any new storage capacity in the country and will instead try to make the best and most flexible use of the storage it already holds.

Now, most Czechs will not shed a tear for RWE’s earnings erosion. But its storage capacity does have a wider strategic role, not just for the Czech Republic but neighbouring countries as well, if gas supplies start to be threatened. With the ongoing Ukraine crisis, commercially unattractive gas storage might just get a lot more crucial and central for everyone.

29-04-2015