VEW AG - Company Profile, Information, Business Description, History, Background Information on VEW AG

Rheinlanddamm 24
D-44139 Dortmund

History of VEW AG

VEW AG is one of Germany's leading utility companies and is active throughout Europe. It consists of five independent operating companies including VEW Energie, WFG, MEAG, Edelhoff, and Harpen. VEW Energie generates and distributes electricity in the German states of Westphalia and Saxony and is involved in energy trading; WGV, a joint venture with Westfälische Ferngas AG, provides gas in Westphalia; MEAG is active in energy and gas markets through various subsidiaries in eastern Germany and Europe; Edelhoff is VEW's waste management arm; and Harpen provides heat to 65,000 German clients, runs small water-power plants and develops real estate. Following the liberalization of Germany's electricity market in 1998, VEW agreed in 2000 to merge with utility giant RWE AG based in Essen.

VEW's Founding: 1900-25

Around the turn of the century electricity generated from burning coal began to alter how things were done, in industry as well as in daily life. Electric machinery and household appliances became more and more popular and increased the demand for electricity. Power generation emerged as one of the most influential and profitable industries of the twentieth century. In the Ruhr, the heart of coal mining in Germany, the Rheinisch-Westfälische Elektrizit&auml×werk (RWE) had become a leader in the market for power generation and distribution by 1914. However, the idea of RWE owner Hugo Stinnes to create a company that supplied the entire Ruhr with electricity, gas, and water seemed frightening to many municipal authorities. Not only would they have to yield price control to a privately owned company, they would also give up a profitable source of income for their chronically starved public coffers. Consequently, a number of community leaders in the Eastern Ruhr decided to establish a counterweight organization to Stinnes' giant in form of power-supply companies controlled by the communities themselves.

By 1914 several large municipal power-supply companies had been established in and around the cities of Bochum and Dortmund. Bochum-based Elektrizit&auml×werk Westfahlen AG was founded in 1906 and served the surrounding counties. Städtisches Elektrizit&auml×werk Dortmund, one of Germany's biggest power stations at that time, was established in 1897 and supplied the city of Dortmund. Dortmund-based Westfälisches Verbands-Elektrizit&auml×werk AG, founded in 1908, served the area around the city.

World War I had major consequences for the power industry. At first, demand for electricity dropped significantly because many factories closed or reduced production. However, a shrinking supply of imported petroleum caused a rising demand for electricity in private households. Between 1914 and 1919 the number of electricity customers in Dortmund doubled from 24,000 to 50,000. In addition, the war industry increased demand. At the same time, power suppliers struggled with diminishing coal supplies, rising prices, and fewer employees. The establishment of new power supply networks in rural areas came to a halt because of high costs, giving rise to electricity-cooperatives as vehicles for interested customers to finance the hook-up.

After the war, coal production in the Ruhr was about one-third of the pre-war levels and a significant part of that was shipped to the Allied victors in reparations. Doubling electricity prices did not make up for rising costs, and lack of coal even forced power stations to close down in the winter of 1919-20. On top of that, the new German parliament, the Nationalversammlung, passed a law for the 'socialization of the electricity industry' that put bigger power stations under government control and organize the country into energy districts. The law drew opposition from private and community-owned energy suppliers, which saw their influence and profits fading away. In October 1920 ten electricity providers, mostly community-owned, founded the Kommunalen Elektrizit&aumlĂ—-Verband Westfahlen-Rheinland (KEV), the Westphalia-Rhineland Municipal Electricity Association, based in Hagen. It intended to technically connect existing power stations and to provide means for them to assist each other, to build and run new power stations, and to lay the necessary cable. The idea was to create an organization large enough to be an independent energy district and not be dominated by RWE. The organization proved useful during the French occupation of the Ruhr and hyperinflation in the early 1920s. However, after coal supplies normalized and the 'socialization' law was unable to achieve political relevance, the bonds between the different KEV members began to loosen again.

Finally, in fall 1924 Elektricit&aumlĂ—werk Westfahlen began negotiations with the two Dortmund-based power suppliers about a possible merger to boost its power to finance the ever growing infrastructure of cable. The three companies had a similar shareholder structure--all were owned by cities or counties. Effective the beginning of 1925, the three companies founded the Vereinigte Elektrizit&aumlĂ—werke Westfalen GmbH (United Electricity Works of Westphalia)--VEW for short. They leased their four power stations and all other facilities, and transferred all their other assets to the new entity. VEW was Germany's fifth-largest power supplier, supplying electricity and gas to 31 cities and counties with 2.65 million people.

Dynamic Growth and Financial Crisis: 1925-30

Although the German economy was still sluggish in 1925, VEW's top management was envisioning a bright future. The development of the energy sector in the United States showed that there was a good chance that electricity consumption would go up quickly in all areas of the economy. To be prepared for the upcoming boom, VEW had to invest in the necessary capacity and infrastructure. However, capital and long-term loans in particular, were not available on the German financial market. In negotiations with the American banks Speyer & Co. and Harris-Forbes the issue was raised that VEW itself didn't have anything to offer in security because all the power stations it operated were only leased. In November 1925 the company's shareholders decided to increase the capital by 40 million Reichsmarks by including all production facilities in its assets. However, it took four years until the last shareholder, the city of Bochum, gave up its resistance and exchanged its shares.

VEW invested heavily in its production facilities and infrastructure between 1925 and 1929. To make production more efficient and reliable all three big power stations were connected and equipped with furnaces that were able to burn coal dust, a technology that boosted output four- to fivefold. While expanding its service territory VEW also took over some water power stations from smaller electricity providers. By the end of the 1920s VEW's 20 water power stations were contributing 7 percent of the total output. Between 1925 and 1927 the company also bought three coal mines to secure a supply of raw materials. At the same time, in mid-1926, demand for electricity started rising and in the late 1920s VEW significantly expanded its network of power lines. Within five years VEW's electricity sales went up by 150 percent and two thirds of its total sales came from industrial and commercial customers. To win less wealthy private households as customers the company introduced an installment-payment system in 1927 and between 1925 and 1929 electricity provided to private households almost doubled. A new subsidiary, the Vereinigte Gaswerke Westfahlen GmbH (VGW) was founded to promote the use of and supply gas as another field of activity.

However, financed by short- and long-term loans the expansion had its price. When short-term debt equaled four and a half times the company's annual profits in fall 1929, the still-ongoing construction work was slowed down. After negotiations with the Prussian government over the purchase of a share of VEW through its power supplier Preussenelektra fell through in spring 1930, VEW's shareholders decided to allow private capital into the business to solve its financial problems. In June 1930 the VEW Aktiengesellschaft was founded and all of VEW's assets were transferred to the new company. VEW GmbH was renamed Westfälische Elektrizit&auml×wirtschaft GmbH (WEW) and functioned as a holding for the community-owned shares in VEW AG. The additional share capital came from a group of German banks led by the Deutsche Bank und Diskonto-Gesellschaft (DD-Bank) and another group of American banks led by Harris, Forbes & Co. In addition to twelve representatives from the shareholding communities, VEW AG's new Board of Directors included eight members from the private banks. However, the worldwide economic crisis which began with the stock market crash in New York in October 1929 was about to reach Germany and created new challenges for VEW.

Economic Crisis and the Nazi Regime: 1930-45

Fading profits and high short-term debt caused VEW in fall 1930 to look for solutions to the company's financial dilemma. A takeover deal with RWE was almost closed, but finally canceled out of mutual distrust and unresolved problems in connection with the possible interests of American creditor banks in VEW. Next, the company concentrated on cost cutting programs, put new construction projects on hold and reduced the number of employees by 25 percent, down from 3,341 in 1929 to 2,504 three years later. The closure of VEW's loss-making coal mines was reversed following massive protests, but workers agreed to have their wages cut by 25 percent. Despite these measures the numbers on VEW's 1931 and 1932 balance sheets remained in the red. Because of the depressed economy and the resulting mass unemployment, VEW's total electricity sales dropped by 18 percent between 1929 and 1932. However, the crisis turned out to be VEW's rescue in another way. After none of the company's two groups of creditors had taken advantage of an option allowing them to change their loans into share ownership in summer 1933, DD-Bank paid off the American partner's share of the loan in 1934 and changed VEW's short-term loan into a long-term loan. Because of the depressed dollar, the company's debt was cut by almost one third and it was able to buy back another dollar bond it had issued in 1928. By 1935 VEW was turning profits again. In late 1940 WEW GmbH was dissolved and the holding's shares in VEW were distributed directly among the 135 community shareholders, including 12 big and 102 small cities, 20 counties, and the regional community organization of the Westfalian region.

The rising mass poverty and unemployment in Germany contributed to the National Socialist Party's coming to power in 1933 which greatly influenced VEW in many ways. In mid-1933 two Nazis took the leading positions in management while about 120 people, among them members of the Social Democratic Party, were fired for political reasons. Within a short period of time the violence and repression on the part of the Nazis, coupled with compliance, adaptation and even support from the staff, made VEW a model company for the Nazis. In accordance with the Nazis' second 'four Year Plan' aimed at preparing the German economy for a war, the Steinkohlen-Elektrizit&auml×-AG (Steag) was founded in 1937. The Essen-based company united all power-generating coal mine operators from the Rheinisch-Westfälisches Kohlensyndikat and was bound by contract to deliver all electricity to VEW which would in turn distribute and charge customers for it. VEW's own facilities and the Dortmund power station in particular, were modernized and a central control system installed in Dortmund.

The demand for electrical power as well as for gas in Germany exploded in the years before World War II and continued to rise until 1944. The industry was under strict government control. While an integrated national high-voltage cable network was strengthened, hundreds of tons of copper wire were replaced by iron wire in low-voltage networks in order to support the war economy with raw material. More and more workers from VEW's coal mines were called to the front and beginning in 1942 replaced by between 445 to 630 slave laborers and prisoners of war from Poland, Italy, Kroatia, Russia, and France. When the war came back to Germany VEW suffered significant losses such as the destruction of the Dortmund power station and of a dam in the river Ruhr for the Möhne water power station between 1943 and 1944.

Consolidation and Going Public After the War: 1945-89

Dr. Friedrich Stiegler, one of the few company executives who were not active Nazis, became VEW's first CEO after the war and initiated the de-Nazification of the company. By January 1946, 186 VEW employees, 12.5 percent of all white-collar workers and 3.4 percent of all blue-collar workers, were dismissed for their Nazi activities. By the time the new German currency was introduced in 1948, most of the war damage had been cleaned up. The currency exchange also freed the company from almost half of its debt. Another financial boost came from a DM 8.15 million loan with preferred conditions from the Investitionshilfegesetz, a fund that was initiated by the German government in January 1952 to accelerate reconstruction in the raw materials industries. However, VEW's growth demanded ever rising investments. The total amount invested between 1951 and 1960, DM 1.1 billion, was only sufficient to cover investments planned for five of the next decade. In addition, a law that allowed a tax exemption for municipally owned enterprises was phased out in April 1965. Consequently, VEW opened up to private capital and went public in May 1966. To ensure that the communities retained their major influence, their shares were given three votes each. In fall 1968 a group consisting of RWE, Conti-Gas, Deutsche Bank and Allianz-Lebensversicherung, the Energie-Verwaltungs-Gesellschaft mbH became a major shareholder with 25.3 percent of VEW's share capital.

In the 1950s coal was the major fuel for generating electricity. VEW's own coal mines were closed down in the 1950s and 1960s. With coal prices moving up steadily, VEW began exploring alternative options. By the mid-1960s the company was using heavy heating oil in two of its power stations as fuel supplementing coal. In October 1968 VEW's first atomic power station went into operation in Lingen. Designed as a demonstration project it was heavily subsidized by the German government. However, it ceased production in 1977 when the repair of a defect would have been too costly. A third alternative fuel competing with coal was natural gas. Based on a contract from October 1969 that guaranteed fixed prices over 20 years, VEW started buying natural gas from Dutch suppliers Amoco Netherlands Petroleum Company and Exploratie- en Produktiemaatschappij Dyas N.V., and later also from Nederlandse Aardolie Maatschappij. However, the two oil shocks of 1973 and 1978 reminded VEW that completely replacing coal as a fuel was not a good idea. The Dutch government raised prices for natural gas after the two oil crises. In April 1988 KKW Emsland, a new atomic power station with a 1,300 megawatt (MW) capacity, started operations in Lingen. However, after the catastrophic accident at the atomic power station in Chernobyl in the Ukraine on April 26, 1986, the public opinion turned against the use of this risky technology. Another nuclear power generator, the THTR300 on the site of the Kraftwerk Westfahlen in Hamm-Uetrop was shut down in the late 1980s.

In addition to economic turmoil, VEW found itself under growing political pressure from the German government to buy domestic coal. As early as in the mid-1960s the government issued laws that obliged German electricity suppliers to use German coal for electricity production. When coal use in the German electricity industry dropped to an all-time low of 27 percent in 1975, the government introduced the 'Kohlepfennig,' a de facto tax added to consumer's electricity bill to subsidize the use of German coal for energy production. In May 1977 with signing the 'Jahrhundertvertrag'--'the contract of the century'--the German public electric industry agreed to buy 250 million tons of domestic coal over the next ten years, 16.5 percent of which was purchased by VEW. In September 1984 VEW took the chance to acquire over 20 percent of the shares of Ruhrkohle AG, Germany's number one coal producer. Three years later VEW's share went up to 30 percent.

By the late 1970s the higher consciousness for environmental concerns was the reason that the steady growth of electricity consumption came to a halt. Instead of building new electricity production facilities VEW invested in its power transmission infrastructure. A new power transmission line made a connection with the networks of other German power suppliers possible in 1980, and four years later a direct connection to the Netherlands was installed. New electronic remote controls and data processing equipment made the exchange of electricity with other suppliers possible. To stabilize gas supply for VEW customers a 250 mile long circle gas pipeline was built between 1974 and 1985.

Reunification, Diversification, and Market Deregulation: 1990-2000

The reunification of Germany provided VEW with an opportunity to expand its business beyond its traditional market in the Ruhr. Based on the Stromvertrag, an agreement between the East German government and the West German energy suppliers, VEW took over 51 percent of the share capital of the East German power supplier Mitteldeutsche Energieversorgung AG (MEAG) based in Halle, Saxony-Anhalt in 1994. Shortly after that VEW acquired shares in three East German gas suppliers in the states of Saxony, Saxony-Anhalt, and Brandenburg.

Besides expanding into new regions, VEW started pursuing a diversification strategy into utility-related service markets. In 1991 VEW Umwelt GmbH (VUG) was founded as VEW's new waste management subsidiary. In August 1992 VEW took over Dortmund-based Harpener AG, a former mining company active in the energy and transportation markets and which owned a considerable amount of real estate. In December 1992 the company acquired a 24.9 minority share in Edelhoff AG & Co., a leading German waste management company and took over the remaining shares two years later. By 1994 the percentage of sales from power generation in total sales had dropped to 85 percent, from 98 percent in the late 1980s. In mid-1995 a new company structure was introduced that enabled VEW to better manage its diverse business activities. VEW AG became a management holding for the four operating companies VEW Energie AG, MEAG AG, Edelhoff Entsorgung (waste management) and Harpen Dienstleistungen (services). In 1998 Westfälische Gasversorgung AG & Co. KG, a Westphalian gas supply company, became the fifth operating company and was transformed into Westfälische Ferngas-AG in 2000.

'European integration' and 'deregulation' became buzzwords of the 1990s with significant consequences for VEW. On February 17, 1997 the new Richtlinie für den Elektrizit&auml×binnenmarkt der Europäischen Union, the guidelines regulating the liberalization of the electricity markets in EU member countries, went into effect which had to become national law within two years. Germany decided to jump headfirst into the cold water and opened its entire energy market with its sudden energy reform which went into effect on April 29, 1998. At that time there were about 80 regional energy suppliers and 900 municipal power companies. The big utilities such as VEW lost traditional customers to new domestic and international players in the energy market which was allowed to trade electricity without having to generate it. VEW responded by getting involved in setting up electricity trading places like the Amsterdam Power Exchange (APX) in which the company holds a 4.9 percent share, and the Frankfurt-based European Energy Exchange (EEX) in which VEW holds two percent, and getting involved in electricity trading itself at the Leipzig Power Exchange established in 2000. To compete successfully against the tough competition, VEW Energie eliminated one level of hierarchy which resulted in the number of employees dropping from 6026 in 1996 to about 3,300 three years later. The energy division was organized in the four subdivisions generation, trade, networks, and distribution.

However, all these measures, including new marketing efforts, with the liberalization of the gas market on the horizon, did not seem to provide a basis for sustainable future growth. Within one year energy prices for businesses dropped between 25 and 50 percent and for private customers ten to 20 percent. While VEW's energy sales rose by 6.1 percent in 1999, profits dropped by 11.2 percent. After alternative plans fell through because of time constraints, VEW's top management proposed to merge with its long-time competitor RWE. On June 27, 2000 VEW's shareholders approved the decision. The name VEW was not carried over to the new entity. Effective in October 2000, the new company became Germany's number one and Europe's third-largest energy company and Europe's 12th-largest industrial enterprise.

Principal Subsidiaries:VEW Energie AG; Westfälische Gasversorgung AG & Co. KG (58.2%); Mitteldeutsche Energieversorgung AG (52.5%); RAG AG (30.2%); Harpen AG (70.6%); Edelhoff AG & Co. (75%).

Principal Competitors: E.ON AG; Bewag AG; Electricité de France SA.


Additional Details

Further Reference

'Das VEW-Konzernergebnis broeckelt weiter ab,' Frankfurter Allgemeine Zeitung, November 5, 1993, p. 20.'Die VEW-Entsorgung ist noch keine sprudelnde Gewinnquelle,' Frankfurter Allgemeine Zeitung, November 8, 1994, p. 21.'Edelhoff hat endlich die Gewinnschwelle ueberschritten,' Frankfurter Allgemeine Zeitung, November 29, 1997, p. 23.Eickeler, Rudolf, 'Beim Strommonopoly stehen Sieger und Verlierer noch nicht fest,' vwd, December 27, 1999.'Harpener ist wieder `blanko-kreditwuerdig',' SĂĽddeutsche Zeitung, September 19, 1992.'Klaus Knizia tritt ab,' SĂĽddeutsche Zeitung, December 29, 1992.'VEW bereitet die Expansion ins Ausland vor,' Frankfurter Allgemeine Zeitung, November 7, 1995, p. 23.'VEW steht unter Akquisitionsdrang,' SĂĽddeutsche Zeitung, May 29, 1992.'VEW strebt ins internationale Energiegeschaeft,' SĂĽddeutsche Zeitung, November 7, 1995.

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