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1. Business Model

Stadtwerke München Group (SWM) makes a major contribution to the quality of life of the people in Munich and the surrounding region. From energy and water supply, local public transport and further mobility alternatives to telecommunications and Munich’s public swimming pools, SWM offers excellent services at fair prices. In these efforts, it focuses on sustainably attractive offerings generating long-term benefits for its customers and the citizens of the Munich metropolitan region. To achieve these goals, SWM has played an active role in the international energy markets for a long time.

SWM is comprised of a total of eight business units as described below.

Business unit Energy Sales

Slightly less than two decades after competition was introduced in energy sales, strong competitors are vying for control of all addressed markets. SWM is still leading in customer satisfaction, image, and market share in Munich. The basis of SWM Energy Sales’ success is SWM’s positive image, which is characterized by sustainability, reliability and customer satisfaction. Our customers can rely on SWM being a strong and future-proof partner for reliable and climate-friendly energy supply - today and in the future.

Business unit Trade

The Trade business unit is the key driver of the energy management and business strategy aimed at further optimising the energy business of SWM Group and hedging it against risks. Its most important responsibilities are market-geared procurement and marketing of energy and the management of the Group’s aggregated market price risks (mainly electricity, natural gas, coal and certificates). In this respect, the business unit is the interface between generation, distribution and individual SWM majority shareholdings on the one hand, and the energy markets on the other.

Business unit Generation and Gas Upstream

Regional

The Generation and Gas Upstream business unit operates and maintains all electricity and district heating power stations in the Munich region as well as the district cooling generation plants.

Supraregional

The supraregional activities within the Generation and Gas Upstream business unit focus on

on the area of renewable energies and efforts to ensure sustainable gas supplies.

In its renewable energies expansion campaign, SWM plans to generate enough green electricity from its own plants to cover all of Munich’s electricity requirements by 2025. To achieve this goal, SWM is continuously increasing the share of electricity generation from renewable sources. However, it is not possible to generate enough green electricity in Munich and the region for a city with a population of more than one million. This is why SWM is also active at a supraregional level in Germany and Europe.

To safeguard a secure and affordable natural gas supply for Munich, SWM also engages in oil and gas exploration and production in Northern Europe via its shareholding in Spirit Energy Limited (Spirit Energy). The gas upstream activities are a key pillar of SWM’s corporate strategy, the goal being to reduce dependence on international oil and gas groups and/or politically instable source regions such as Eastern Europe and the Middle East.

Business unit Energy Networks

Expansion and operation of distribution networks for electricity, gas, district heating and water are key elements of the basic public services SWM provides to the citizens of Munich. The main task of the Energy Networks business unit is to continue to ensure above-average supply quality and reliability for SWM customers despite the cost pressures that have increased further due to incentive regulation.

Business unit Water

SWM collects the drinking water for Munich in the foothills of the Bavarian Alps, supplying some 300 million litres to the Bavarian capital every day. Munich’s drinking water ranks among the best in the whole of Europe and boasts excellent analytical results.

Business unit Public Transport

The Public Transport business unit comprises Munchner Verkehrsgesellschaft mbH (MVG) and the public transport operations of Stadtwerke Munchen GmbH. MVG is the passengers’ contracting partner. Stadtwerke Munchen GmbH is responsible for providing all underground and tramway transport services on behalf of MVG. The bus services are performed by MVG, Stadtwerke Munchen GmbH and private cooperation partners. SWM holds an equity interest (under company law) in one of these cooperation partners - Munchner Linien GmbH & Co. KG. 

- Munchner Linien GmbH & Co. KG.

Business unit Telecommunications

The product portfolio of the Telecommunications business unit is comprised of a broad range of Internet, voice and bandwidth services for residential and business customers on a fixed-network and mobile-communications basis. As a regional provider, SWM offers services to large sections of Bavaria, the greater Ulm area and the Main-Kinzig district in Hesse. The product portfolio is continuously developed further with a view to safeguarding SWM’s competitiveness. The services are performed jointly by M-net Telekommunikations GmbH (M-net), SWM Services GmbH (SWM Services) and Stadtwerke Munchen GmbH.

Business unit Public Pools

In 18 modern indoor and outdoor pools, ten attractive sauna facilities, the Prinzregenten ice stadium and two modern fitness centers, M-Bader offers pool visitors a wide range of opportunities to keep themselves fit and healthy, spend leisure time and relax.

2. Business Report

Economic Environment

Energy markets

The Joint Economic Forecast Project Group continues to see the German economy in an upswing that has become stronger and broader. Preliminary statistics indicate that the country’s gross domestic product grew by 2.2% in 2017. Alongside consumer spending, international business and capital expenditure have helped fuel the expansion.

Developments in the energy markets are key influencing factors for SWM. They mainly impact the contribution margins of power plants and the prices of emission allowances, natural gas, oil and coal.

Peak-load contribution margins of gas-fired power plants slowly recovered from their lows recorded in early 2017, moving continuously upwards until autumn and subsequently remaining in a range of EUR 5 to EUR 7, subject to fluctuations. By contrast, the contribution margins of base-load coal-fired power plants hovered around the mark of EUR 2 because coal prices rose to a greater extent than electricity prices.

The price of CO2 certificates pulled away from the lows of around EUR 4 realised in 2016, climbing significantly up to the vicinity 

of EUR 8. One major reason was progress in the reform of EU-ETS (EU Emissions Trading System) to be implemented in the period after 2020.

In the first half of 2017, mild weather conditions had put pressure on gas prices. Only when temperatures turned cooler and robust demand for liquefied natural gas (LNG) from China and India emerged did gas prices rebound to the vicinity of EUR 18/MWh in the fourth quarter.

Uncertainties about whether the production cuts implemented by participating OPEC and non-OPEC countries in the first half of 2017 would continue in the second half of the year, too, and in conjunction with a resurgence in US crude oil production depressed oil prices during spring 2017. The reduction in crude oil inventories in the US, which began over the course of the year, and increasing compliance on the part of the countries participating in output cuts resulted in a renewed trend in oil prices from summer 2017 onwards. In late November, the participating OPEC and non-OPEC countries extended the output cuts. The oil price closed the year at USD 67/bbl (Brent variety).

From spring 2017 onwards, coal prices for deliveries in the following year rose continuously into autumn, reaching a range of USD 85 to USD 90 per tonne (API#2). Subsequently, they vacillated around this level for the remainder of the year. Apart from the Chinese government’s 2016 decision to scale back its own coal production, one key price driver was the low level of available generation capacity in French nuclear power plants.

Conditions on the sales market

In the residential and business customer segments, competitive pressure, which was high to begin with, increased even further in 2017. Internet price comparison portals, the ease of switching providers online and new market entrants from other industries have stepped up the momentum in the business with existing customers. Overall, a further increase in already high incentive offers and aggressive advertising have led to a rise in consumer churn rates.

In the traditional electricity and heating market, new possibilities for self-sufficient energy generation and supply are intensifying the competitive situation. New legal framework conditions, for instance, make it possible for customers to generate their own electricity using on-site photovoltaic plants and ensure economic benefits for 

self-consumption (tenant electricity models). In some instances, self-supply initiatives have decoupled areas and quarters from the public grip and, hence, the traditional electricity and heating market.

In the industrial and service segments, a moderate upward trend in wholesale gas and electricity prices induced many customers to opt in favour of early contract termination in exchange for new supply contracts with a duration of several years at more favourable price levels. By contrast, individual customers are increasingly adopting an exchange-related approach and cover their requirements via forward and spot market products.

Competition in the key account segment remains challenging, with the trend towards exit of individual market participants continuing. However, the margins that can be generated seem to have bottomed out, and slightly higher margins can be achieved in certain segments or products.

Conditions in energy policy

Discussions at the European level mainly revolved around what is called the “Winter Package”. These proposals aim at making the European Union’s internal electricity market and renewable energy sources sufficient for the future and ensure realisation of climate and energy goals by 2030.

The reform of the emissions trading system will help reduce the certificate surplus twice as quickly as previously envisaged. From 2019 onwards, 24% of the surplus will be removed from the active market and transferred to the market stability reserve (MSR). From 2023 onwards, the number of emissions allowances that may remain in the market stability reserve must correspond to the number of allowances auctioned in the previous year, while the remainder - presumable more than 1.5 billion allowances - will be voided. A further success of the reform is the fact that emission trading will be more closely interlinked with national metrics in the future. When a member state wants to decommision coal-fired power plants, it will be allowed to remove allowances corresponding to the ensuing reductions in emissions from the market without running the risk of these national emission reductions been cancelled out by additional emissions in another country. This market stability reserve will play a helpful role in this respect, too.

In the transport sector, too, a sizeable group of measures was presented in 2017 under the heading of

“Europe on the Move”. The goal is to regulate the transition to low/zero-emission vehicles. For SWM, this set of initiatives is particularly relevant because it includes a directive on the promotion of clean and energy-sufficient road vehicles, an amendment to the regulation on passenger coach services aimed at granting access to domestic markets for regular services and the action plan for the introduction of an alternative fuels infrastructure throughout Europe.

The most important legislation passed in Germany before the parliamentary election was the German Act for the Modernisation of Grid Charges (Netzentgeltmodernisie -rungsgesetz - (NEMoG). After a decidedly controversial discussion on the topic of avoided grid charges in the run-up to the adoption of the law, the NEMoG basically confirmed the current and future existence of avoided grid charges and froze the basis of calculation at the 2016 level.

Conditions in the public transport sector

The key drivers of conditions in the public transport sector are the Germany Passenger Transportation Act (PBefG), European state aid regulations [EU Regulation 1370/2007] and contract award regulation. The provisions of the German Passenger Transportation Act, which was amended with effect from 1 January 2013, are being challenged in a number of court proceedings. Municipal public transport operators must be in a position to provide transport services under competitive terms. This results not only from legal rulings, but also from the financial state of local public transport systems.

Competition for public funding for transport infrastructure expansion and maintenance will become even fiercer. Federal financial assistance under the Municipal Transport Financial Act (GVFG) will not continue beyond 2019.

According to the current status, however, cost-intensive refurbishing projects for the existing infrastructure will not qualify for subsidies in the future either. Going forward, the hitherto available unbundling funds will be part of states’ budgets without being earmarked for any specific purpose. The question of whether they will be appropriate to public transport at the state level remains unanswered. Another still open question is whether the current discussion on air pollution control will lead to additional state funding for investment projects. At the same time, there is also a huge and increasing need to renew existing infrastructures in Munich - a situation that is indicative of the national trend.