Negative Energy

E.ON Pulls the Plug

EON dpa
E.ON is splitting up. Sources: DPA/AP
  • Why it matters

    Why it matters

    • Germany’s largest utility E.ON is trying to stem its losses with a radical restructuring that splits off its core fossil fuels from its renewables business.
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  • Facts

    Facts

    • E.ON said it would split into two companies, one in renewables and one in coal, oil and nuclear.
    • E.ON said the restructuring will lead to a €4.5 billion charge against earnings.
    • The also said it sold its activities in Spain and Portugal for €2.5 billion.
    •  
  • Audio

    Audio

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Germany’s biggest utility E.ON said Monday it would split itself into two, giving up on fossil fuels and nuclear energy to focus on renewables.

The large-scale, emergency restructuring — the most dramatic yet by a utility following Germany’s decision to phase out fossil fuels — was cheered by investors as an overdue, if practical response to the country’s new political realities. E.ON shares rose in early trading.

Under the plan, E.ON said it will combine its old energy businesses — in oil exploration, coal and nuclear power — into a separate company that will be listed on the stock exchange. Most shares in this new unit will be given to E.ON’s existing shareholders.

E.ON said it will retain a minority stake in the business, which it will gradually sell. In addition, E.ON said it had found a buyer willing to pay €2.5 billion for its businesses in Spain and Portugal, and was seeking buyers for its activities in Italy and the North Sea.

The company, based in Munich, said it was basing its future on its renewables business, along with distribution networks and customer service, which will be separately listed.

“E.ON’s existing broad business model can no longer properly address these new challenges”

Johannes Teyssen, E.ON chief executive

The restructuring will be costly. E.ON said it will take a €4.5 billion ($5.6 billion) charge against income with this overhaul, and warned of “substantial” impacts on earnings for fiscal 2014.

Investors greeted the news as a signal that E.ON, which has been battered by Germany’s decision to exit conventional energy, had finally accepted political reality after a year of mounting losses.

Shares rose 3.85 percent to €14.81 on Monday morning.

The E.ON chief executive, Johannes Teyssen, said the utility had to react to “dramatically altered global energy markets, technical innovation and more diverse customer expectations.”

“E.ON’s existing broad business model can no longer properly address these new challenges,” Mr. Teyssen said.

The company said it expected fiscal 2014 earnings of €8 billion to €8.6 billion and would pay a dividend of €0.50 per share for 2014 and 2015, compared with €0.60 last year.

Monday’s morning share price rebound was a drop in the bucket for the utility’s investors, who have seen shares fall 75 percent from an all-time high in 2008.

Some analysts also questioned the value and hidden expenses of the restructuring overhaul.

“I struggle to see where the value creation in all this is,” Lawson Steele, an analyst for Berenberg Bank, told Handelsblatt Global Edition. “Lawyers and advisers will have a field day with this and there will be triple million fees for that, and higher management costs as the new company will need a management team.”

Mr. Steele did say however that by splitting the company, E.ON could draw in different types of investors. “Those who want steady cash flows can invest in the renewables part, while those wanting exposure to commodities can buy into the upstream exploration business.”

Germany’s utility companies have struggled to cope with low demand for energy, low wholesale power prices and a surge in renewable energy sources.

Germany’s utility companies have struggled to cope with low demand for energy, low wholesale power prices and a surge in renewable energy sources.

Under the government’s Energiewende, or energy transformation program, Germany in 2011 announced plans to phase out nuclear energy by 2022 and draw at least 80 percent of energy from renewables by 2050. The decision was taken by the German chancellor, Angela Merkel, as a reaction to the Fukushima nuclear accident in Japan.

Since then, Germany has offered billions of euros in subsidies to makers of wind turbines and solar energy firms to build out the nation’s renewable energy grid. The subsidies have led to a glut of electricity on the market, which has cut wholesale electricity prices in half.

The plummeting prices have translated into billions of euros in losses for German utilities, which have responded by pulling nuclear power plants, some of them brand new, out of commission amid the altered economics of the energy sector.

In this multi-path strategy, Germany has moved fastest in the area of nuclear fuel.

Germany in 2011 ordered the closure of eight nuclear reactors, with the remaining nine to be closed by 2022.

The renewables sector was not ready to replace the shortfall, however, and in the interim the gap has been filled by coal power and, to some extent, gas.

The restructuring by E.ON comes as the utility looks ahead to billions of euros in costs to close down its nuclear plants.

E.ON said these costs will be transferred to the new company’s balance sheet and were fully covered, but it still leaves investors with heavy liabilities. E.ON and its rival German utility, RWE, are suing the German government over costs of the nuclear shut downs, saying they should be compensated for mothballing the plants.

 

052 Eon WTB-01

 

The Berenberg Bank analyst, Mr. Steele, suggested that by the time E.ON’s new company is ready to list on the stock exchange, the courts may well have ruled in the energy companies’ favor. “These costs may have come off the balance sheets by then anyway,” he said.

E.ON’s business has also been hit by a series of untimely acquisitions.

In 2007, the utility spent €11.5 billion to buy energy companies in Spain, Italy and France. The deals were struck just before the financial crisis hit and the Southern European economies slowed dramatically. E.ON has had to write off 60 percent of the purchase price.

It also lost billions on an ill-fated joint venture in Brazil.

The company confirmed that it will sell its businesses in Spain and Portugal to Macquarie Group for €2.5 billion and has said it will also consider selling its assets in Italy, and its North Sea exploration and production operations.

E.ON said it will spend €4.8 billion on investments in renewables next year, €500 million more than it had originally estimated. It plans to expand its wind business in Europe, strengthen its solar business and ingrate energy distribution networks across Europe and Turkey.

In 2011, the firm has said that it would cut 10 percent of its workforce, or some 11,000 jobs, after the government announced its nuclear shut down program.

Chief executive Mr. Teyssen, who took charge of the company in 2010, insisted that this latest overhaul is not a job-cutting exercise. E.ON currently employs just over 60,000 people. Around 40,000 of these will remain in E.ON’s renewables business, while 20,000 will move to the new company. The company’s supervisory board approved the new strategy on Sunday.

 

Meera Selva is an editor with Handelsblatt Global Edition. She has covered companies and markets out of London and Berlin. To contact the author: selva@handelsblatt.com

 

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