Rwe Ag Business Information, Profile, and History

Company Perspectives:

Liberalisation, internationalization, and new technologies are the central challenges for RWE. The company thinks and acts with customers in mind, reliably and with the one eye on the future. Speed, efficiency and a strong commitment to competition make the group a leading international multi-utility company.

History of Rwe Ag

RWE AG is the holding company for the dominant electricity producer in Germany: RWE Group. That subsidiary supplies much of the country's electricity via a distribution and transmission network that extends over 139,000 kilometers--that is, a distance more than three times around the world. Founded at the end of the 19th century to supply electricity to the city of Essen, the subsidiary RWE Group now comprises six independently operating divisions. Electricity production remains the core business of RWE AG, but there has been some diversification in recent years into other energy sectors, namely oil, natural gas, water, and petrochemicals.

Turn of the Century Beginnings

The timing of RWE's foundation was fortuitous. At the end of the 19th century, Germany underwent the most rapid industrialization to date. In the decades before World War I, Germany moved into second place behind the United States among the world's industrial nations. Between 1880 and 1913, German coal output increased fourfold and production of steel tenfold. Chemicals manufacturing and heavy engineering were other strengths. Given its location at the heart of Germany's coal and steel industry and the presence of factories owned by Krupp, Thyssen, Siemens, and other German industrial giants, Essen was an appropriate base for the company that would come to dominate Germany's electricity supply. Even today, following the relative decline of heavy industry, Essen's state of North Rhine Westphalia still produces over one-quarter of German gross domestic product. Essen itself remains the energy center of Germany, playing host also to Ruhrgas and Ruhrkohle.

Such a dynamic economy, with its predominance of energy-intensive industries, needed power. Towards the end of the 19th century, only Friedrich Krupp AG generated electricity in Essen; this power was consumed primarily by Krupp plants. However, the municipal authorities were debating the desirability of establishing electricity supplies for electric trams and street lighting; small-scale electric street lighting was introduced in 1888 and the debate about power for trams was well under way in 1890.

In 1896, Elektrizitäts-Actien-Gesellschaft vorm W. Lahmeyer & Company (EAG) applied to the authorities of Essen for approval to build and manage a small power station. Despite heavy competition from Allgemeine Elektrizitäts-Gesellschaft (AEG) and Siemens & Halske, in 1898 Lahmeyer signed a 40-year contract to supply Essen with electricity. On April 25, 1898, Lahmeyer, together with banks from Frankfurt, founded the Rheinisch-Westfälisches Elektrizitätswerk Aktiengesellschaft (RWE). The company began operating with a steam generator to supply a few thousand consumers in the immediate environs of Essen. The first RWE-generated electricity was supplied on April 1, 1900.

The Market for Energy Broadens

From the beginning, RWE's leaders were conscious of the key role electricity would play in the industrial economy. Hugo Stinnes, a leading industrialist in the region, became chairman of the board. He was convinced the electricity industry would grow into an industrial giant and that an integrated supply industry able to take advantage of economies of scale was the best way forward. Throughout its history RWE has been heavily involved in the development of larger-scale generating units and high voltage transmission and distribution networks.

Stinnes also believed the task of developing this new industry was too important to be left solely to private enterprise. He concluded that the way forward lay in the coming together of private business and public authorities in a synthesis of the principles of private enterprise and public service. The city fathers of Essen, Mülheim an der Ruhr, and Gelsenkirchen, persuaded by Stinnes of the advantages of this approach, bought shares in RWE. By the beginning of World War I, a majority of the seats on the RWE board--17 out of 29--were occupied by public representatives. The mixed economy of RWE was established from an early stage. Private entrepreneurs managed the daily affairs of the company but the public authorities retained an influence on all fundamental policy questions.

It was in the first decade of the 20th century that the basic structure of Germany's industry took shape. In 1908, RWE and Vereinigte Elektrizitätswerke Westfalen AG (VEW) signed the first demarcation contract--a contract which remains in force to this day. Demarcation contracts mark out the supply areas of a utility and enable the larger companies to carve up the country by agreeing to keep out of each other's territory. Demarcation contracts are bolstered by concession contracts that grant utilities exclusive rights to public land for cables in return for concession payments to public authorities. In view of its growing contracts with a number of municipal authorities, RWE was rapidly able to build up its business and extend its supply area.

The system of concession contracts has persisted. However, attempts are being made to open up electricity supply to competition again. In 1980 a 20-year limit was placed on the duration of a concession contract, and, by the end of 1994, local authorities were free to chose alternative electricity suppliers. Large amounts of money are at stake; Essen, for example, receives 20 percent of RWE's nonindustrial tariff income, an arrangement the city may wish to leave intact. However, other utilities are known to wish to expand their activities into RWE's area and competition could become more intensive as the 1990s unfold.

The Importance of Coal

In 1899 Stinnes took on the young engineer Bernhard Goldenberg as technical adviser. By 1902 Goldenberg had become chairman of the technical board and was deciding company policy. Goldenberg shared Stinnes's belief that it was necessary to take advantage of scale economies if electricity supply was to be cost effective. This strategy of maximizing sales needed a secure and plentiful supply of cheap fuel and technological advances in generation and distribution.

From the beginning, coal had been central to the growth of the German industrial economy and to the development of RWE in particular. In 1990 and 1991, brown coal and hard coal accounted for 48.1 percent and 23 percent, respectively, of electricity generated by RWE. Nuclear power was responsible for a further 21 percent, with water accounting for almost 4 percent. Gas and oil accounted for RWE's remaining primary energy consumption.

Hugo Stinnes, the driving force behind the creation of RWE, was originally a coal merchant and was most conscious of the direct connection between coal and electricity. In the early days of RWE, brown coal was not at first considered for use in electricity generation. The Reisholz power station built by Goldenberg to the south of Düsseldorf in 1908 and 1909, for example, was designed for hard coal. Goldenberg was, however, aware of the potential of brown coal, which is mined from open-cast mines and hence is much easier and cheaper to mine than hard coal, which is mined from deep pits. Goldenberg knew that Europe's largest reserve of brown coal was to be found west of the Rhine between Cologne and Aachen.

The end of World War I brought serious coal shortages as two million tons of hard coal had to be exported monthly as part of Germany's war reparations. This situation precipitated the use of brown coal in Germany and RWE set about securing its brown coal supplies. In 1920, a "common interest" contract involving an exchange of shares was signed between RWE and Roddergrube AG according to which Roddergrube, the first company to exploit brown coal commercially back in the 1870s, undertook to supply brown coal to RWE. Shortly afterwards, RWE acquired a majority holding in Roddergrube. Similar "common interest" contracts were signed with other coal producers in 1921.

In 1932 RWE developed its relationships with coal producers a stage further and acquired a majority shareholding in Rheinische Aktiengesellschaft für Braunkohlenbergbau (Rheinbraun). RWE's participation helped Rheinbraun, which owned the Fortuna power station--one of the largest power stations at that time and the subject of expansion plans--to extend its contract to supply electricity to the city of Cologne. Over the years, the Rheinbraun family of companies has been fully integrated into the RWE group. RWE's relationship with Rheinbraun is typical of the complex cooperation and ownership network that RWE gradually developed with coal producers and other electricity suppliers.

The Effects of World War II

German military requirements of the late 1930s and World War II made big demands on German heavy industry, including electricity. The end of the war brought with it the need for massive reconstruction, not only for the German economy but also for RWE. The Goldenberg works were destroyed, other plants were severely damaged, and coal mines, pipelines, and distribution networks were devastated. Massive external financial assistance was required, as well as technical rebuilding. Reconstruction, however, brought technical opportunities. The plant was not merely rebuilt or repaired as obsolete equipment was replaced by the most modern, high pressure boilers and turbines.

The RWE leadership was more convinced than ever that the future of the electricity industry lay in the development of a fully integrated network of electricity producers, and was instrumental in the 1948 formation of the Deutsche Verbundgesellschaft (DVG). A forum for national electricity cooperation, DVG was composed of Germany's largest electricity utilities.

In 1952 RWE and its subsidiaries were finally released from the postwar control of the Allies. At this time Franz Hellberg, an internationally recognized expert on brown coal, joined the RWE board. He was charged with the task of building up the production of electricity from brown coal, a comparatively cheap source of fuel.

In the postwar years, brown coal was increasingly mined from new deep-lying open-cast mines. These mines, which could reach a depth of 300 meters, were part of a transition to bigger management units and required new mining technology. Excavators and diggers were developed which could move 100,000 cubic meters of coal a day.

By 1957, 45 percent of RWE's brown coal supply originated from the new open-cast mines. This transition made big investment demands. An extraordinary general meeting in October 1959 increased authorized capital by DM 147 million to DM 575 million. These funds were used to acquire 85 percent of the brown coal company Neurath AG.

The Demand for Electricity Feeds RWE Group's Growth

Increasing electricity demand necessitated productivity increases. RWE chose to bring these about through a major rationalization of Rhine brown coal. In December 1959 it transferred its shareholding in Neurath AG to Rheinbraun. In the same month, several other brown coal subsidiaries of RWE were brought under the umbrella of Rheinbraun. The assets so transferred included those of the Braunkohlen-und Brikettwerke Roddergrube AG, the Rheinische AG für Braunkohlenbergbau und Brikettfabrikation, and the Braunkohlen-Industrie AG (Biag).

As the German economic miracle got into its stride in the early 1960s, electricity demand surged ahead and a new phase of power station construction orders began. Brown coal provided the basis for this expansion, but it was also in the early 1960s that RWE became involved in the development of nuclear power. By 1990 nuclear power was responsible for over 20 percent of RWE-generated electricity. However, questions have been raised in Germany about the safety of nuclear power, which will limit the contribution of this source of electricity in the foreseeable future.

The development of secure and cheap fuel supplies was only one factor in RWE's growth. Bernhard Goldenberg initiated the policy of the development of coal and the technology of larger generating units, but Arthur Koepchen, Goldenberg's successor in 1917 as chairman of the technical board, was responsible for implementing the distribution of electricity over much longer distances than had hitherto been possible.

A Vision of Integration

Koepchen was firmly anchored in the RWE tradition of optimizing economies of scale. He believed electricity production was justified on economic grounds only through the generation of electricity in favorable locations and through the supply of large districts, and envisaged increasing cooperation between neighboring utility companies. In short, he had a vision of a fully integrated national electricity supply industry with cooperation between power stations regardless of fuel basis.

In order to achieve this, Koepchen had to connect RWE with the South where, since World War I, utilities in Prussia, Bavaria, and Baden had developed rapidly, with a particular reliance on hydroelectric power. Koepchen's goal was to connect the Alpine hydroelectric plants with the stations on the Rhine and the Ruhr. This brought legal, technical, and economic challenges.

Koepchen drew on the experience of the South Californian Edison Company which, since 1921, had demonstrated the possibility of transmitting electricity over high tension cables of 220 kilovolts, rather than the previous technical limit of 110 kilovolts. This breakthrough made possible a more extensive distribution network, and, in 1924, RWE began the construction of a north-south network with the assistance of Germany's biggest electrical engineering companies, Siemens and AEG.

By April 1930, Germany's first "electric highway" was completed, linking the densely populated areas of the Rhineland and Westphalia with the South. It was only within such a union that the development of the water power of Bavaria made economic sense, as Bavaria was sparsely populated in comparison to RWE's main supply area and by itself could not justify the construction of large production units. With work on the distribution network under way, RWE became involved in the construction of power stations in the southern part of the country. For example, in 1924 RWE participated, along with Grosskraftwerk Würtemberg, in the founding of the Voralpberge Illwerke, and, in 1928, work on the massive Schluchseewerk in the southern Black Forest began.

Moves Toward Diversification

Electricity production had always been one of the main sectors of RWE's activities. In 1988 RWE took a major step towards diversification with the acquisition of Deutsche Texaco. This deal prompted a reorganization of RWE's activities into the following divisions: energy, mining and raw materials; petroleum and chemicals; waste management; mechanical and plant engineering; and construction. All divisions operate independently. RWE AG fulfills the role of a holding company and serves to steer and coordinate Group interests in all strategically important matters.

The two main revenue-generating divisions were energy, organized under RWE Energie AG, and petroleum and petrochemicals, organized under RWE-DEA AG für Mineralöl und Chemie (RWE-DEA). In the fiscal year 1991, RWE Energie contributed 37 percent of the total earnings of the RWE group and RWE-DEA 41 percent (including petroleum tax).

The formation of RWE-DEA signaled the fact that, although electricity remained the core business of the RWE Group, diversification within the energy field was an important theme of the future. RWE-DEA had its roots in the 19th century. It was established in 1899 as the Deutsche Tiefbohr AG. In 1911 its name was changed to Deutsche Erdöl AG. In 1966 the Texaco Group acquired over 97 percent of the capital and altered the name to Deutsche Texaco in 1970. On June 29, 1988, Texaco sold its share in the company to RWE, giving rise to the reorganization is RWE and the creation of RWE-DEA. This new division of RWE was responsible for sales of DM 20.2 billion during fiscal year 1991. RWE-DEA was involved in exploration for and processing and marketing of crude oil and natural gas, and the production of petrochemicals.

The petroleum business was RWE-DEA's dominant source of income, but the company also engaged in some expansion in eastern Germany and examined the possibility of involvement in other European countries. Interest in the former East Germany was not confined to petroleum products. In June 1991 an international consortium led by RWE and VEBA, with shares of 37.5 percent each, was reportedly poised to take over East Germany's largest oil refinery, Schwedt, which had an annual capacity of 11 million tons and a pipeline link to the former Soviet Union. RWE-DEA also intended to build up its chemical business, and, with a view to this, made a bid for Vista Chemicals of the United States in December 1990. The bid was ultimately successful. RWE-DEA finalized the acquisition in June 1991.

By taking over RWE's core business of electricity production, RWE Energie represented the greatest continuity with the past. The 1990s held out exciting possibilities for this division as a result of the unification of Germany in 1990. The East German electricity supply industry was unmodernized, inefficient, and polluting. The joint venture Vereinigte Energiewerke AG (VEAG) was formed in 1991 to rectify the situation. In return for investment in the supply of electricity to eastern Germany of DM 30 to DM 40 billion, VEAG was accorded a major slice of the market. The main participants in the venture were RWE Energie and PreussenElektra, with 35 percent each, and Bayernwerk, with 30 percent. However, the demands of European integration and continuing environmental vigilance provided major challenges in the 1990s.

Throughout the 1990s, RWE rode a telecommunication roller coaster. The company repeatedly sought out opportunities to merge with telecommunication companies and build their network up strong. In 1998, when the German telecommunication market opened up, competition became fierce for RWE's telecommunication subsidiaries. RWE disposed of some of their major telecommunication holdings by the end of 1998.

Moving into the Millenium with A New Group Vision

RWE introduced a new vision for the company in 1999. Rather than continuing to spread their interests thinly across a wide range of fields, RWE decided to focus their activities and resources on their core divisions: water, gas, electricity, and waste management. The new vision included the "multi-utility/multi-energy concept" which aimed at positioning RWE as Europe's leading international partner in the European energy and utility market. The company announced that they intended to sell the remaining non-core businesses by the end of 2003 (this included the unloading of their telecommunications interests that began in 1998). Conversely, RWE has focused attention on its core activities through strategic and global acquisitions. The company has acquired the United Kingdom's Thames Water and Innogy (electricity and gas), the United States' American Water Works, Slovakia's Nafta (gas storage), Itay's Elletra (electricity), the Netherlands' SSM Coal, and the Czech Republic's Transgas (gas). The 2001 purchase of Thames Water made RWE the third largest water supplier in the world. The purchase of Innogy made RWE Europe's second biggest electricity supplier behind Electricite de France and ahead of Italy's Enel. And the purchase of the Dutch coal trading company SSM Coal made RWE Europe's largest coal trading company. As RWE purchased up energy companies, concern grew over the decline in the number of choices available to customers. Concern about the privatization of utilities was also raised with the RWE's rash of utility purchases.

The high prices that RWE shelled out to acquire Innogy ($7.8 billion), American Water ($4.6 billion), and Thames Water ($6.29 billion) caused many spectators to question whether RWE would be able to continue without divesting interest in at least one of its divisions. Although the company focused its energy into the four core divisions, with the intent to transform itself into a one-stop-shop to cut costs on customer services, billing, and payment collection, the reality remained that RWE did not offer multiple utilities in each country where they operated. In 2002 RWE announced that the company intended to slow the rush of big money purchases. Dr. Richard Klein, head of corporate development and mergers and acquisitions at RWE, told Utility Europe in May 2002, "Our top priority is to integrate all our new businesses, as we did successfully with Thames Water." He continued, "However, our [acquisition] strategy is not necessarily on hold. We are still looking closely at new chances and observing markets for opportunities in Europe and the United States. However, their dimensions will be far smaller, more towards rounding off our current strong positions." Klein refused to discuss whether this statement could mean RWE was planning to bid for Vivendi Environment, an environment services company that RWE was interested in purchasing since their offer of EUR 30 billion was turned down in 2000.

Principal Subsidiaries:RWE Energie Aktiengesellschaft; Kernkraftwerke Gundremmingen Betriebsgesellschaft mbH (75%); Koblenzer Elektrizitätswerk und Verkehrs-AG (57%); Kraftwerk Aftwürttemberg AG (92%); Lech-Elektrizitätswerke AG (75%); Main-Kraftwerke AG (70%); Moselkraftwerke GmbH; Rhenag Rheinische Energie AG (54%); Rheinbraun Aktiengesellschaft; Maria Theresia Bergbaugesellschaft mbH; Reederei und Spedition "Braunkohle" GmbH; Rheinbraun Australia Pty Ltd; Rheinbraun U.S. Corporation; Rheinbraun Verkaufsgesellschaft mbH; RWE-DEA Aktiengesellschaft für Mineraloel und Chemie (99%); Condea Chemia GmbH; DEA Mineraloel Aktiengesellschaft; Vista Chemical Company (USA); RWE Entsorgung Aktiengesellschaft; American NuKEM Corp; R + T Entsorgung GmbH (51%); Lahmeyer Aktiengesellschaft für Energie-wirtschaft (64%); Rheinelektra AG (62%); Heidelberger Druckmaschinen AG (57%); Heidelberg Harris GmbH; Lahmeyer International GmbH (55%); NU.K.EM GmbH; Starkstrom-Anlagen-Gesellschaft mbH; Starkstrom-Gerätebau GmbH; Stierlen-Maquet AG; Hochtief Aktiengesellschaft vorm. Gebr. Helfmann (56%); D & M Partner, Inc (USA); MIT Gesellschaft für Management-Beratung, Informationssysteme und Technologie mbH (MIT-Beratung).

Principal Competitors:E.On AG; Royal Dutch/Shell Group of Companies; Vattenfall AB.

Chronology

• Key Dates:
• 1896: The city of Essen signs a contract with utility company Elektrizitäts-Actien-Gesellschaft vorm. W. Lahmeyer & Company (EAG) to build a power plant.
• 1898: EAG and friends form the company Rheinisch-Westfälisches Elektrizitätswerk Aktiengesellschaft (RWE).
• 1900: The first RWE-generated electricity is supplied on April 1.
• 1906: With the acquisition of the utilities Elektrizitätswerk Berggeist AG, Brühl, and Bergische Elektrizitätswerke GmbH, Solingen, RWE extends its market beyond Essen and into the Kölner Bucht and Bergisches Land regions.
• 1933: National Socialists seize the seats on RWE's supervisory board held by the regional administrative bodies.
• 1948: At the initiative of RWE chairman, seven large electrical utilities join forces to form the interconnected power syndicate Deutsche Verbundgesellschaft (DVG).
• 1952: RWE is released from Allied Control.
• 1962: RWE and Bayernwerk decide to build Germany's first commercial nuclear reactor, Gundremmingen A.
• 1988: RWE further diversifies its Group with the acquisition of Deutsche Texaco AG, Hamburg; the chemicals and petroleum group is renamed RWE-DEA AG für Mineralöl und Chemie.
• 1990: Rheinisch-Westfälisches Elektrizitätswerk AG is renamed RWE Aktiengesellschaft.
• 1999: The company introduces a new vision of focusing their activities and resources, moving away from their past trend of diversification.
• 2000: RWE merges Lahmeyer AG into RWE AG.
• 2002: RWE agrees to buy U.K. power group Innogy Holdings.