E.ON AG, the German utility that bought French, Spanish and Italian power plants in 2008, said it took a 2.6 billion-euro ($3.6 billion) charge to reflect lower asset values as electricity demand trails expectations.
Writedowns led to an impairment charge of about 1.1 billion euros to cover goodwill and 1.5 billion euros for other assets, Dusseldorf-based E.ON said today in a statement. The charges are effective Sept. 30, and Chief Executive Officer Johannes Teyssen is set to comment on the company’s outlook and strategy in a third-quarter earnings release on Nov. 10.
E.ON snapped up Endesa SA assets after failing to buy the entire Spanish utility in a contest with Italy’s Enel SpA. While Endesa was set to benefit from rising energy use, the recession reduced electricity demand and prices in Spain averaged less in 2010 than in 2009 unlike those in Germany, a European benchmark.
“Those markets are a tough environment and expectations for energy demand were a lot higher,” said Michael Schaefer, an analyst with Equinet AG in Frankfurt who recommends investors hold E.ON stock. “It isn’t as if this kind of announcement hits the market on completely the wrong foot.”
E.ON reversed earlier losses in Frankfurt trading and was up 0.7 percent at 22.55 euros as of 12:41 p.m. local time, valuing the company at about 45.1 billion euros.
“The development of electricity and commodity prices is in some cases leading to significantly lower margins and capacity utilization,” E.ON said, adding that the contributions to earnings before interest and tax that it had expected from the three markets “have deteriorated in the medium to long term.”
Reduced Investment Plans
E.ON completed a deal to buy 11.5 billion euros of power plants and shareholdings in energy retailers in the three countries in June 2008. Germany’s largest utility has since reduced investment plans to reflect lower energy demand and has sold assets to reduce debt amassed through acquisitions.
The charges will reduce the company’s net income, E.ON said. Mirko Kahre, a company spokesman, said the utility won’t publish precise figures on the impact ahead of the Nov. 10 earnings and conference with investors. The charges are effective Sept. 30, he added.
The charges could slash full-year net income by about 1.8 billion euros, according to Schaefer, the Equinet analyst.
E.ON’s adjusted Ebit and adjusted net income, which the utility uses to calculate its dividend, won’t be affected, according to the statement. The charges aren’t cash-effective, the company said.
Ebit Climbs 9.6%
Separately, E.ON said nine-month adjusted Ebit rose 9.6 percent to 8 billion euros from 7.3 billion euros in the same period a year earlier.
The company confirmed its outlook for 2010 adjusted Ebit to meet the 2009 level or rise by 3 percent as well as for adjusted net income to be at the same level as last year.
“Today’s writedowns are a look in the rear-view mirror,” UBS AG analysts Patrick Hummel and Per Lekander wrote in a note to investors today. E.ON CEO Teyssen’s comments at the investor day next month “should be key for the shares.”
Today’s announcement may be one more sign that E.ON has to broaden the scope of its strategy beyond Europe, according to Schaefer at Equinet.
“The question is whether Europe is still a growing market for utilities,” the Frankfurt-based analyst said by phone. “Carrying on as usual isn’t an option, just a new cost-cutting program won’t satisfy investors.”
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