Innogy warns of loss at UK unit Npower as market ‘worsens’

German utility says competition is ‘extremely fierce’ as British division’s earnings fall.

Innogy, the German energy company, said its UK gas and electricity business Npower would make a loss this year amid a “worsening market environment” and “extremely fierce competition” in the sector — even without the Conservatives’ proposed price cap on standard tariffs.
Innogy said overall earnings rose 4 per cent to €1.62bn in the first quarter, on the back of a strong performance in its grid business, and it confirmed its guidance for the full year.But it said earnings at Npower declined 74 per cent to €34m in the quarter, as it lost customers in the UK and was forced to retain others by offering contracts at “much more favourable conditions”. Chief financial officer Bernhard Günther said the Conservative Party’s price cap proposal “and the general regulatory tendency that we’re seeing … aren’t making the UK more attractive for us as an investor”.
He declined to say whether Innogy was reconsidering its presence on the UK market in response to the proposal, “though we as management are obliged to think about all kinds of measures”. He said the company would be focusing for now on trying to make Innogy more efficient.
UK earnings were also hit by sales shortfalls and higher procurement costs in the commercial and corporate customer business, while an increase in tariffs announced in February arrived too late to lift profits.
Last year, Npower embarked on a two-year recovery programme which it said would lead to the loss of 2,400 jobs from its 11,500-strong workforce. The move was announced after Npower made a €137m loss for 2015, compared with a profit of €227m in 2014, and acknowledged “serious process and system-related problems in residential customer billing”.
Innogy said its UK arm had implemented more than half the £200m in cost savings envisaged up to the end of 2018, but that these were “far from sufficient to make up for the continued deterioration in market conditions and reduced margins”. It was therefore considering further efficiency measures.
Innogy was spun off last year from German utility RWE — combining its renewables business, power grids and retail energy services. Its initial public offering in October raised €4.6bn, making it Germany’s largest flotation since 2000.
The company said first-quarter earnings before interest and tax for its grid and infrastructure division increased 29 per cent, to €708m, as cooler weather in eastern Europe drove up volume on its gas distribution networks, especially in the Czech Republic. Adjusted ebit for the renewables arm declined 13 per cent to €134m, however, amid reduced plant utilisation at its wind farms due to lower wind levels.
Adjusted ebit in the retail division also fell 9 per cent to €490m, thanks to a drop in customer numbers and sales in the Netherlands and Belgium and the continued problems at Npower.
Overall, adjusted earnings before interest, tax, depreciation and amortisation climbed 4 per cent to €1.62bn, while revenues fell 7 per cent to €12.4bn.The company confirmed its outlook for 2017, forecasting adjusted ebitda for the year of €4.4bn and adjusted net income at €1.2bn. However, it said the outlook for its retail division did not take account of “potential further regulatory intervention in the UK retail business”, for example the Tories’ proposed price cap on standard tariffs. Mr Günther said the company would continue paying 70 to 80 per cent of its adjusted net income in dividends.John Musk of RBC Capital Markets said that so far investors had focused on the UK-listed members of the Big 6, such as Centrica and Scottish Power, for the potential impact of the possible price cap. “It may be that the message from Innogy today puts the European suppliers in the spotlight,” he said.

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