Half-Year Results

E.ON’s Conventional Loss

ARCHIV - Der Vorstandsvorsitzende von Eon, Johannes Teyssen, spricht am 07.05.2015 während der Hauptversammlung in der Grugahalle in Essen (Nordrhein-Westfalen) vor dem Schriftzug Eon und Uniper. Foto: Rolf Vennenbernd/dpa (zu dpa "Eon drohen neue Milliarden-Abschreibungen wegen Aufspaltung" vom 04.08.2016) +++(c) dpa - Bildfunk+++
E.ON CEO Johannes Teyssen will need a lot of patience to get through the renewable transition quagmire.
  • Why it matters

    Why it matters

    E.ON is desperately trying to navigate through Germany’s transition to renewable energy. It’s having to write off conventional power to do it.

  • Facts


    • Germany’s largest utility posed a €2.9-billion loss in the first six months of this year on the back of €3.8 billion in write downs in the value of its conventional power unit.
    • Uniper, a subsidiary responsible for conventional power, began operating at the start of this year and will be spun off in September, leaving E.ON to focus on renewables.
    • E.ON shares, once the most valuable on Germany’s DAX, tumbled more than 6 percent on Wednesday.
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Got to break some eggs to make an omelet? That seems to be the mantra of E.ON Chief Executive Johannes Teyssen these days as he navigates the troublesome split of Germany’s largest utility into two completely separate parts.

The company on Wednesday announced a massive €3-billion ($3.3 billion) loss for the first half of the year, sending its share price tumbling and pulling the entire blue-chip DAX into negative territory.

The entire loss and more was blamed on write-downs at its conventional power unit, Uniper. In all, E.ON wrote down €3.8 billion on the subsidiary, which was created in 2015 as part of an ambitious strategy to navigate Germany’s government-mandated transition to renewable energy.

In September, E.ON will divorce itself from conventional energy further by taking Uniper public. That will allow E.ON to focus on the future: renewable energy, smart grids and services.

The big loss posted Wednesday is part of an effort by Mr. Teyssen to come clean before he sends Uniper on its way. And yet, the half-year results show that both companies will be starting their new life badly weakened.

Wednesday is not likely to be the end of the bad news, either. Uniper will post its own results for the first time on August 22. A loss in the billions is widely expected there as well.

It’s been a tremendously painful few years for Germany’s traditional utility companies, once the powerhouses of the German stock market.

The problem is that Uniper was massively overvalued in the past, as Handelsblatt reported last week. E.ON, which will keep a 47-percent stake in the Uniper, is now being forced to adjust its own results based on the expected market value when the company goes public.

According to E.ON’s report outlining the separation, Uniper has a book value of about €15.5 billion. But the company’s power plants have dramatically lost value over the past few years as the German government has subsidized and prodded utilities to abandon conventional sources and shift to renewables.

The result: Analysts expect Uniper’s market value to be €5 billion at most when it goes public next month. Sources say that E.ON has come to the same realization, which is why they are now busy writing down the value of their own stake.

Shares in E.ON tumbled more than 6.6 percent on the half-year results Wednesday morning before recovering slightly. Its stock was trading down 5.77 percent to €8.89 at 10:45 local time in Frankfurt, making it the worst performer on Germany’s blue-chip DAX and dragging other energy stocks down with it.

It’s been a tremendously painful few years for Germany’s traditional utility companies, once the powerhouses of the German stock market. All of them have been forced to take drastic measures in the hopes of salvaging their fortunes.

E.ON was the most valuable company on the blue-chip DAX at the start of 2008, its shares valued at more than €50, but its fortunes began to dwindle after the financial crisis. They’ve spiraled further downward as the German government sped up a dramatic transition to renewable sources in the aftermath of Japan’s Fukushima nuclear disaster in 2011.

Wind and solar power have been given priority on the country’s electric grid, sending electricity prices spiraling downward and preventing conventional utilities from relying on fat profits from coal and nuclear energy as they had in the past. Profit margins for conventional sources have collapsed.

Over the past few years, E.ON hasn’t been able to keep up with the write downs that are needed on its conventional power arm. Having already posted losses in 2014 and 2015, it’s now likely to post another full-year loss in 2016.

The news isn’t all bad, however. Take out the write-downs, and the conventional power burden, and E.ON is at least still profitable. E.ON said adjusted operating earnings were down 6 percent to €2 billion. Adjusted net income from the “new E.ON,” as Mr. Teyssen put it, exclusing the massive one-time costs, was down 28 percent to €600 million.

“Our first-half results strengthen my conviction that our new strategy is the right response to the massive changes energy markets have undergone in recent years,” Mr. Teyssen insisted in a statement.

The restructuring will continue at Uniper once it goes public. Its new boss, Klaus Schäfer, has already said he plans to cut annual costs by as much as €500 million and lay off workers.

But Mr. Teyssen’s E.ON won’t entirely be freed from its legacy troubles either. The company has been forced to hold onto its nuclear energy division, rather than spin it off to Uniper as had been initially planned. Winding down the nuclear plants, as the German government has demanded, is also likely to be more expensive than initially expected.

RWE, the country’s second-largest energy company, has decided to split its operations in the same vein as E.ON – only in reverse. A new subsidiary Innogy began operating in April, taking over the renewable-energy portfolio.

Also unlike E.ON, RWE plans to keep a majority stake in its subsidiary. About 10 percent of the new company will be taken public this autumn and additional stakes will be sold to institutional investors over time. RWE hopes to use the money from the IPO to pay down its debts.

RWE Chief Executive Peter Terium plans eventually to switch and lead Innogy, leaving his deputy Rolf Martin Schmiz in charge of what remains.


132 Eon utility E.ON - WTB 2015 Neu 2016-03-11-01


Jürgen Flauger is Handelsblatt’s energy correspondent, based in Düsseldorf. Christopher Cermak of Handelsblatt Global Edition contributed to this story. To contact the author: flauger@handelsblatt.com 

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