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E.ON, RWE Poised to Cut Spending as Nuclear Tax Erodes Profits

E.ON AG and RWE AG, two of the worst performers in Germany’s benchmark DAX share index this year, are poised to cut dividends and investment because a proposed tax on nuclear reactors will erode the utilities’ profits.

Germany wants 2.3 billion euros ($3 billion) a year from the nuclear industry from 2011 to trim the budget deficit, the government said in June. That led Dusseldorf-based E.ON to extend its drop this year to 20 percent while RWE, based in Essen, is down 18 percent. HeidelbergCement AG has posted the biggest decline in the 30-member DAX, which is up 6.6 percent.

The country’s two largest electricity suppliers will invest about 17 billion euros in power plants and natural gas pipelines and other energy assets this year to use more cleaner-burning fuels. The spending may fall in coming years as the tax could cut yearly earnings at RWE by 1 billion euros and at E.ON by 1.5 billion euros, said Kepler Capital Markets analyst Ingo Becker.

“You can’t expect to hit the private sector hard and then expect it to keep spending,” said Becker, who has “reduce” recommendations on both stocks. “The nuclear tax could take away more than half of the profits from running a reactor at the current forward curve.”

The government says E.ON, RWE and two smaller rivals have an advantage over other German utilities as European rules that put a price on emitting carbon dioxide makes their reactors more profitable than coal- or gas-fired generators.

E.ON is scheduled to report second-quarter earnings and hold conference calls for journalists and investors on Aug. 11. RWE will do the same the following day. The German government has said it will present its strategy for nuclear, alternative energy and fossil fuels in late September.

Reactor Operators

Germany’s four reactor operators will meet Deputy Finance Minister Werner Gatzer this week to discuss an agreement on the tax, Handelsblatt reported yesterday, citing unidentified people close to the companies. The deal would see the utilities agree to the tax and avoid similar levies in the future, the newspaper said in an e-mailed summary of an article.

Spokesmen for E.ON and RWE said the companies have not yet commented on the potential effect on earnings of a 2.3 billion- euro nuclear tax as details haven’t been set.

RWE may cut its investments and dividend if Germany enacts the tax, Rolf Pohlig, the utility’s chief financial officer, said in an interview with Westdeutsche Allgemeine newspaper in June. Julia Scharlemann, a spokeswoman for the company, confirmed the comments.

Dividend Drop

E.ON’s dividend for 2010 may drop to 1.38 euros a share from the 1.50 euros it paid in May for 2009, according to Eurex Single Stock Dividend Futures on Bloomberg. RWE’s payment may slide to 3.33 euros a share from the 3.50 euros for 2009, the data show.

RWE will invest about 7 billion euros a year until 2013, the utility said in May. Some 95 percent of this year’s spending is committed while that share falls to 50 percent in 2013, according to a company presentation on its website.

E.ON has said that its spending will fall 40 percent to 6 billion euros in 2012 as the utility pays down debt. The company ensures “some growth” by spending 5 billion to 6 billion euros a year, Chief Financial Officer Marcus Schenck said on a March conference call.

The decline in spending could bring more fluctuations in power prices, said Michael Schaefer, an analyst with Equinet AG in Frankfurt.

“Who’s going to invest in power lines and offshore wind parks if not the big utilities?” Schaefer said. “There would no longer be an affordable and reliable power supply but rather a volatile one based on volatile prices.”

Energy Users

A lack of investment could increase Germany’s dependence on imports of gas and electricity, harming large energy users like the country’s metals industry, Schaefer said.

The nuclear industry is also waiting on Chancellor Angela Merkel to fulfill an election pledge and allow reactors in the country to run past scheduled shutdown dates.

Merkel wants to use the extension to help meet her country’s CO2 reduction targets and tap some of the additional profits to invest in renewable energy.

Economy Minister Rainer Bruederle has said that splitting the profits from an extension equally between the government and nuclear companies would be “fair.”

Merkel may have to settle for nuclear reactor lifetimes shorter than the 60 or so years in other European countries after she lost control of parliament’s upper house in a defeat for her Christian Democrats in a state election in May. The Social Democrats and Green Party, which set Germany on course to phase out nuclear power in 2000, oppose an extension.

“There’ll be a recovery in confidence in the sector once the market believes it has a dependable basis for the structures and rewards for the companies,” said Schaefer at Equinet. “The situation is complicated, but it can be solved.”

To contact the reporter on this story: Nicholas Comfort in Frankfurt at ncomfort1@bloomberg.net

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