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RWE deep in plans to spin-off Thames and American Water

Separation seen as necessary to raise RWE share price

Could be finalized by Friday

Berlin, October 23, 2005 -- as reported by Berliner Zeitung

After acquisitions that have cost them billions in the recent past, the Essen-based RWE multi-utility is facing an imminent about-face on the strategy for its international water business. 

RWE CEO Harry Roels is rumored to be near a deal to spin-off UK water utilities Thames Water and North America's largest private water provider, American Water.

According to the Berliner Zeitung, Harry Roels and his executive board managed, under strict secrecy, to work out the conditions under which RWE's Thames and American Water could be quickly split from RWE's lucrative gas and electricity core business.

In top-secret RWE-head Roels informed stakeholder representatives last week about the position RWE had reached. A special session was expected to be held on Monday to get employee representatives on board on the strategy about-face.

Then, the plans were expected to be officially presented to the advisory board for decision during an extraordinary meeting reportedly scheduled for Friday.

Extensive Investments Needed

Berliner Zeitung predicts the separation model to focus on a split of its non-continental water activities from the RWE Group.

By grouping the two water companies under the umbrella of an independent Thames Water the stakes in Berlin (Berliner Wasserbetriebe) and Zagreb would be grouped with RWE Energy AG. The energy group leads the other, much  smaller water activities in Germany as well as central and eastern Europe.

As a first step, up to 30 per cent of the new Thames Water AG is expected to be placed on the capital markets in an IPO, while RWE would retain the remaining 70 per cent for the time being. The placement of the IPO would most likely be handled by WestLB, who contributed significantly to formulating the original concept.

RWE expects little of the proceeds this deal to benefit RWE Group directly.
Instead,  Roels and Fischer hope the split would provide a sustained new boost to the RWE share price.

Analysts have described the  financial results from the British and American water activities as a decided handicap to RWE's share price which is significantly below average.

Both Thames Water and American Water have massive investments in the cards for overdue infrastructure rehabilitation. These costs could only be covered over time with price rises to consumers. The US and UK authorities allow only
limited increases. The British regulatory authority last summer cut the
price increases RWE/Thames had applied for during the next five years from
a total of 38 per cent to a lean 22 per cent.

Sale Nearly Impossible

The prices accepted by Roels's predecessor Dietmar Kuhnt for the
acquisitions of Thames (2000) and American Water (2003) have proven to be
an additional burden, as they temporarily increased the Group's net debt to
considerably more than 20 billion euros. At these values, RWE simply
can't sell the companies.

There are parties interested in buying American Water. But the price offered is far below the value carried on the RWE books. RWE could avoid the horrendous book losses through the separation model with an IPO.

RWE spokespeople refused to issue any comment as is their policy on market speculation.