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E.ON Takes $3.6 Billion Charge on Electricity Plants

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Oct. 27 (Bloomberg) -- 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 acquired Endesa SA power plants and shareholdings in the three countries after failing to buy the entire Spanish utility in a contest with Enel SpA of Italy. The German company’s bid to grow outside of its home country has become costlier after first taking charges on the assets in 2009, primarily on an increase in the Italian corporate tax rate.

“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 fell 0.9 percent to 22.18 euros as of 4:28 p.m. local time in Frankfurt trading. That values the company at about 44.4 billion euros.

Lower Margins

“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.”

E.ON acquired its French, Spanish and Italian assets under former CEO Wulf Bernotat. Teyssen was his deputy from 2008 and succeeded Bernotat in May.

The German company said in February 2009 that it would book a 1.8 billion-euro charge on assets in France, Italy and Spain. E.ON cited a 5.5 percentage point increase in Italy’s corporate tax rate to 33 percent as well as a “gloomier” outlook for the country’s energy market.

While Endesa was set to benefit from rising energy use in Spain, the recession reduced electricity demand, and prices in the country averaged less in 2010 than in 2009, unlike those in Germany, a European benchmark.

Reduced Prices

Spanish day-ahead power has averaged 36.82 euros a megawatt-hour so far this year, less than the 38.43 euros for the same period in 2009, according to broker prices on Bloomberg. German day-ahead power has averaged 45.15 euros a megawatt-hour so far this year, up from 41.22 euros in the same period in 2009, according to the data.

German power prices function as a European benchmark as the country is the European Union’s biggest electricity user and its location in the center of the bloc means it is more connected to neighboring markets than other countries.

E.ON completed a deal to buy 11.5 billion euros of power plants and shareholdings in energy retailers in France, Italy and Spain 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 earnings and conference with investors.

Ebit Climbs

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.

Nine-month adjusted Ebit rose 9.6 percent to 8 billion euros from 7.3 billion euros in the same period a year earlier, E.ON said separately.

The company maintained its outlook for 2010 adjusted Ebit, which it forecasts will match the 2009 level or rise by 3 percent. Adjusted net income may be the same 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.”

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

To contact the editor responsible for this story: Will Kennedy at wkennedy3@bloomberg.net

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