May 11 (Bloomberg) -- E.ON AG and RWE AG, Germany's two largest utilities, may say earnings in the first quarter declined because of increased costs for coal and natural gas.

Essen-based RWE's net income probably fell 10 percent to 834 million euros ($1.1 billion), according to the median estimate of 14 analysts surveyed by Bloomberg. E.ON, based in Dusseldorf, may report profit fell 9 percent to 1.33 billion euros, a survey of 12 analysts showed. Asset sales boosted earnings at both companies in the first three months of last year.

The soaring price of hard coal, which has doubled in the past two years, and natural gas will weigh on earnings this year, RWE Chief Executive Harry Roels, 56, said April 15. Germany's appointment of a power-grid regulator will limit the ability of RWE and E.ON to raise prices, and legislation that caps carbon dioxide emissions may burden the industry with $25 billion of costs this year, energy consultant ILEX Energy estimates.

``Both companies have to make an effort to control rising costs,'' said Martin Mueller, who manages more than 100 million euros for WGZ Bank in Luxembourg, including shares of RWE and E.ON. ``They won't be able to pass on all their costs for much longer as they face pressure on profits from the new regulator.''

RWE shares have gained 15 percent this year, giving the company a market value of 26.1 billion euros. E.ON shares have lost 1 percent this year, valuing the company at 46 billion euros, Germany's third-biggest company. The 17-member Bloomberg Europe Electric Index has gained 6 percent in the period.

New Regulator

European power markets are opening up to full competition. A new state regulator for natural gas and electricity, to be appointed this year and based in Bonn in northern Germany, will oversee transport prices grid owners charge from peers.

RWE and other European Union utilities as of this year have to buy rights to emit carbon dioxide, blamed by scientists for global warming, if they pollute above a certain level.

Operating profit, or earnings before interest and taxes, at RWE may decline 1 percent to 1.95 billion euros, according to the Bloomberg survey. E.ON's operating profit may rise 6 percent to 2.49 billion euros, the survey found, the slowest growth in a first quarter in the company's four-year history.

E.ON spokeswoman Sabine Hower and RWE spokesman Michael Rosen declined to comment on the estimates. Both companies are scheduled to report earnings on May 12.

Declining profit in Germany contrasts with higher utility earnings elsewhere in Europe. Edison SpA, Italy's second-largest power company, yesterday said first-quarter profit more than doubled to 86 million euros. Endesa SA, Spain's largest power company, today may report profit rose 10 percent to 486 million euros. Enel SpA, Italy's largest utility, also reports today.

`Concerned'

E.ON CEO Wulf Bernotat, 56, on March 10 said he's considering large acquisitions as earnings slow from selling power and gas. The company before ruled out a large acquisition for more than a year. Its shares fell 3 percent on the statement.

``Investors are concerned about E.ON's financial strength,'' said Roland Vetter, a London-based analyst at Morgan Stanley, who has an ``overweight'' rating on the stock. ``Some investors fear that E.ON could destroy value with an acquisition, even though we don't share with view.''

Earnings at RWE and E.ON have exceeded analysts' estimates in three of the past four quarters. E.ON is rated a ``buy'' at 74 percent of analysts followed by Bloomberg, with the others advising investors to ``hold'' the stock. RWE is rated a ``buy'' at 40 percent of the banks, with 60 percent recommending a ``hold'' or ``sell'' of the shares, according to Bloomberg data.

Roels of RWE raised power prices for German households 3 percent last year and wants to reduce costs by 3.3 billion euros by 2006. He lowered spending by 2.6 billion euros last year and plans another 210 million euros in cuts this year. RWE and E.ON expects faster economic growth in Central Europe to boost demand.

Negative Outlook

E.ON had 5.5 billion euros in debt at the end of December. Standard & Poor's cut its outlook on E.ON to negative, indicating it's more inclined to cut the rating, after the company's comments about acquisitions. It rates the company AA-, the fourth highest out of 10 investment-grade ratings. Moody's Investors Service rates E.ON Aa3, equivalent to Standard & Poor's rating.

Investors' assessment of the risk to lend E.ON and RWE money is little changed in the last six months, according to bond prices. The utility's 4.25 million euros of 5.75 percent bonds due in 2009 yield 2.92 percent, or 0.26 percentage point more than government debt of similar maturity. The risk premium, or spread, is little changed from 0.27 percentage points half a year ago.

To contact the reporter on this story: Peter Dinkloh in Frankfurt at pdinkloh@bloomberg.net.

Last Updated: May 10, 2005 19:10 EDT