Germany’s largest utility E.ON on Wednesday warned of declining earnings as its business slows faster than expected on plunging electricity and gas prices.
The utility, based in Essen, said it expected operating profit to fall by up to 21 percent this year from its level in 2015. Its shares fell as much as 2.5 percent in Frankfurt.
E.ON plans later this year to spin off its conventional gas and coal power generation businesses from its renewables business as Germany moves ahead with its forced shift into alternative energy. German Chancellor Angela Merkel decided in 2011 to shut down nuclear power plants by 2022 following Japan's Fukushima disaster and increase the share of renewable energy production.
“The difficult market environment will cause, in particular, free cash flow to be below earlier assumptions; future investments and dividends will have to reflect this,” E.ON said in a statement.
The glut of government-subsidized solar, wind and renewable power has pushed down German wholesale electricity prices by a third since the start of 2015, hitting E.ON and rivals RWE, Vattenfall and EnBW. RWE, which is also splitting operations, announced a €170-million loss on Tuesday.
I can totally understand the decision to split in two from a strategic point of view. Whether that generates any additional value is still up in the air in our view. Andrew Fisher, Analyst, German bank Berenberg
“E.ON’s future is difficult,” said Egmondt Haidt, an analyst at Feingold Research, a research firm in Würzburg near Frankfurt. “The problem is that wholesale electricity prices are slumping. The EEX exchange prices for 2017 are even lower than those for 2016. As a consequence, it is clear that E.ON’s earnings continue to be under pressure.”
“I think the dividend will be cut further this year. It is currently at €0.50 a share, but if E.ON hadn’t made the promise to pay it the company would have reduced it already in 2015. I think reductions are possible the next few years to €0.25 or €0.20 a share,” Mr. Haidt told Handelsblatt Global Edition.
RWE shocked investors last month by cancelling its 2015 dividend on ordinary shares and writing down its power plants by €2.1 billion.
E.ON said it expected operating profit before interest, tax, depreciation and amortization to be between €6 billion and €6.5 billion, or $6.6 billion to $7.1 billion this year, up to 21 percent less than the €7.6 billion the utility earned in 2015.
E.ON said it “expects its outlook to be significantly lower” amid accounting costs of the breakup planned for the second half of this year. By spinning off its gas and coal power plants in a new business called Uniper the utility hopes the separated firms will each have better options to deal with Germany's energy shift.
“I can totally understand the decision to split in two from a strategic point of view. Whether that generates any additional value is still up in the air in our view,” said Andrew Fisher, a London-based analyst at German bank Berenberg.
“The reason being two things we have discussed: the requirements to finance the future costs of handling nuclear operations and just how long do we face a period of low commodity prices. Both are totally outside management control but are very important factors of how E.ON and Uniper will be perceived by the market,” Mr. Fisher told Handelsblatt Global Edition.
A government commission is currently evaluating how much the Germany's four biggest utilities should pay for shutting down nuclear power plants and storing atomic waste, but without running the risk the companies become insolvent. The German cabinet has so far insisted utilities are fully liable for all costs.
Amid writedowns on power plants, which have become less profitable or even unprofitable as electricity prices have slumped, E.ON said it lost €900 million in the fourth quarter, compared with a net loss of €3.1 billion in the same period a year earlier.
E.ON’s total loss in 2015 was €7 billion, the biggest ever in a single year by the firm, according to Bloomberg. The utility wrote down its assets by €8.8 billion last year, mainly due to lower valuations of its power plants.
E.ON’s shares were down 0.9 percent at €8.29 per share at noon on Wednesday in Frankfurt. The utility's stock has lost almost 41 percent of its value in the past twelve months, compared with a 16-percent drop in Germany's DAX Index.
Gilbert Kreijger is an editor with Handelsblatt Global Edition in Berlin, covering companies and markets. To contact the author: [email protected]