History   

The reconciliation from the operating result to net income was characterized by one-off charges. These were related to discontinued operations (American Water), among other things. Another negative effect was felt from the IFRS accounting treatment of commodity derivatives, which, however, will be offset in later periods. Furthermore, we had lower capital gains compared with the same period last year. The drop in the effective tax rate had a positive impact.

Non-operating result
€ million

Jan – Sep
2008

Jan – Sep 20071

+/–
€ million

Jan – Dec
2007

1

Figures adjusted; see commentary

Capital gains

47

327

–280

339

Impairment losses

Restructuring, other

–553

–412

–141

–488

Non-operating result

–506

–85

–421

–149

In the first nine months, the non-operating result decreased from –€ 85 million to –€ 506 million. Its components developed as follows:

  • Capital gains totalled € 47 million and were thus markedly down on the figure achieved a year earlier (€ 327 million). The latter included the book gain on the sale of our Dutch gas grids. Furthermore, we had transferred a 25 % stake in rhenag Rheinische Energie AG to RheinEnergie AG in 2007. We divested another 8 % in rhenag in the period under review, which resulted in a capital gain.
  • No impairment losses were recognized for continuing operations in the reporting period.
  • The result stated under “Restructuring, other” decreased although there were substantial negative effects in the same period last year. It dropped by € 141 million to –€ 553 million. This was primarily due to a special item relating to the accounting treatment of derivative transactions, which are mainly concluded to hedge the prices of future gas sales by RWE Supply & Trading. Pursuant to IFRS, these derivatives are accounted for at fair value at the corresponding balance sheet date, whereas the underlying transactions are only recognized with an effect on profit or loss later on, when they are realized. This results in short-term effects on earnings, which are neutralized over time. In the reporting period, the rise in fuel prices caused RWE Supply & Trading’s aforementioned oil price-linked gas supply agreements to gain value, whereas reductions in value in the same amount were incurred from the hedges (which show the exact opposite reaction). Since the one-sided disclosure of changes in the fair value of derivatives does not reflect economic reality, we have been recognizing the changes in the non-operating result since the interim financial statements for the first half of 2008. These derivatives caused us to incur a charge of € 320 million as of September 30, 2008. This is already much less than in the first half of the year (€ 430 million). The decline in oil prices in the third quarter was the main reason. By year-end, the negative effect on earnings is likely to decrease further, since we will have realized part of the counteracting underlying transactions with an effect on earnings by then.

The “Restructuring, other” item also includes the amortization of RWE npower’s customer base. It amounted to € 214 million and was thus marginally lower than 2007’s comparable figure (€ 247 million) for currency-related reasons. Changes made to nuclear provisions led to € 69 million in income (first three quarters of 2007: € 125 million).

Financial result
€ million

Jan – Sep
2008

Jan – Sep
20071

+/–
in %

Jan – Dec
2007

1

Figures adjusted; see commentary

Interest income

624

648

–3.7

855

Interest expenses

–660

–1,025

35.6

–1,334

Net interest

–36

–377

90.5

–479

Interest accretion to non-current provisions

–561

–629

10.8

–771

Other financial result

–422

168

–351.2

112

Financial result

–1,019

–838

–21.6

–1,138

The financial result decreased by € 181 million to –€ 1,019 million. The decline is primarily attributable to the “Other financial result,“ which was clearly in negative territory at –€ 422 million. A contributing factor was that we wrote down securities or sold them at a book loss. In the prior-year period, the “Other financial result” was unusually high, partially due to income from the reduction of our interest in Heidelberger Druckmaschinen (€ 142 million). Furthermore, we had benefited from a one-off effect stemming from the externalization of our pension obligations: At the end of March 2007, we had transferred € 7.9 billion in funds, earmarked to finance pension commitments to an external asset management company (RWE Pensionstreuhand e. V.) within the scope of a contractual trust arrangement (CTA) and netted them against provisions for pensions. The deconsolidation of special funds implemented in this context led to € 155 million in one-off income. The negative development witnessed in the “Other financial result” is contrasted by a € 341 million improvement in net interest. One factor that came to play here was that our average net financial debt over the course of the first three quarters of 2008 was lower than in the corresponding period in 2007. The interest accretion to non-current provisions also displayed positive development. It was down by € 68 million. This was primarily due to the decline in provisions for pensions in connection with the CTA.

Our continuing operations generated income before tax amounting to € 4,263 million — 7 % less than in 2007. Our effective tax rate was down ten percentage points to 28 %. This is mainly due to the fact that German income tax rates were cut as part of the 2008 German corporate tax reform. Furthermore, we successfully concluded tax litigation cases. The RWE Group’s normalized tax rate for 2008 is 31 %, compared with 39 % in the same period last year.

Income from continuing operations after tax improved by 8 % to € 3,057 million.

The RWE Group’s discontinued operations (American Water) closed the period with a loss of € 598 million, which was largely caused by the IPO of American Water. When we floated 39.5 % of the shares in the US water utility, we recognized an impairment loss and had to write down the value of our remaining stake in the company accordingly.

The minority interest totalled € 248 million, which was substantially more than in the same period last year. Some of the companies in which entities outside the RWE Group hold a minority stake posted considerable rises in income. This mainly holds true for RWE Energy’s regional companies in the Czech Republic and Hungary.

The RWE Group’s net income declined by 22 % to € 2,211 million. Our earnings per share dropped from € 5.04 to € 4.09. The number of RWE shares outstanding decreased as a result of the share buyback programme concluded in May. There was an average of 541.1 million shares outstanding in the period under review, compared with 562.4 million a year earlier.

Reconciliation to net income

 

Jan – Sep
2008

Jan – Sep 20071

+/–
in %

Jan – Dec
20071

1

Figures partially adjusted; see commentary

2

RWE shareholders’ share in income.

Operating result

€ million

5,788

5,505

5.1

6,533

Non-operating result

€ million

–506

–85

–495.3

–149

Financial result

€ million

–1,019

–838

–21.6

–1,138

Income from continuing operations before tax

€ million

4,263

4,582

–7.0

5,246

Taxes on income

€ million

–1,206

–1,751

31.1

–2,081

Income from continuing operations

€ million

3,057

2,831

8.0

3,165

Income from discontinued operations

€ million

–598

141

–524.1

–274

Income

€ million

2,459

2,972

–17.3

2,891

 

 

 

 

 

 

Minority interest

€ million

248

138

79.7

224

Net income2

€ million

2,211

2,834

–22.0

2,667

Recurrent net income

€ million

3,077

2,572

19.6

2,985

Earnings per share

4.09

5.04

–18.8

4.74

Recurrent net income per share

5.69

4.57

24.5

5.31

Effective tax rate

%

28

38

–26.3

40

Another important performance indicator is recurrent net income. It is net income adjusted for one-off effects and is decisive for our dividend policy. It does not include the non-operating result. Material one-off effects in the financial result, taxes and discontinued operations are deducted as well. In consequence, the goodwill impairment for American Water is disregarded, as is the burden on earnings from the aforementioned changes in the fair value of commodity derivatives. In the first three quarters of the year, recurrent net income totalled € 3,077 million. This represents an increase of 20 % compared with the same period in 2007. We expect to see a rise of over 10 % for the year as a whole.


 

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