E.ON AG, the world’s largest utility by sales, said profit may fall as much as 32 percent this year because of a new German tax on its nuclear plants and reduced earnings from selling power and gas.
Adjusted net income, which E.ON uses to calculate its dividend, will slip to 3.3 billion euros ($4.59 billion) to 4 billion euros in 2011 from 4.88 billion euros last year, the Dusseldorf-based company said today. Adjusted earnings before interest, tax, depreciation and amortization will drop to 11.2 billion euros to 11.9 billion euros from 13.3 billion euros in 2010, the company said.
E.ON has responded to German Chancellor Angela Merkel’s plan to help plug the deficit with additional asset sales and cost cuts. The utility, which said it expects adjusted Ebitda to return to last year’s level in 2013, is also grappling with losses from long-term gas purchase contracts and power supply tariffs that were signed during the global recession.
“Especially in the gas segment E.ON should still be facing strong headwind,” said Mario Kristl, an analyst at DZ Bank AG who recommends investors buy the stock. “This segment suffers from the current oversupply and low gas prices.”
The global gas unit will post adjusted Ebitda of 700 million euros to 1.2 billion euros this year, down from 2 billion euros due to “continued keen competition” and disconnect between wholesale prices and the tariffs E.ON pays under multi year contracts, the utility said.
E.ON fell 31.5 cents, or 1.4 percent, to close at 22.80 euros at 5:35 p.m. in Frankfurt.
“The outlook for 2011 seems to be okay in our view, the drop in adjusted Ebitda comes as no surprise,” Kristl said in a note. “At the same time, we expect further progress within the scope of the divestment program” and the utility is likely to reduce net debt this year.
Earnings will be affected “to a lesser degree” next year, according to the company. The utility’s forecast for 2013 Ebitda returning “to roughly the 2010 level of at least 13 billion euros” is based on its current portfolio.
Merkel wants to raise an annual 2.3 billion euros in the six years through 2016 from E.ON and Germany’s next three biggest utilities. That will slice E.ON’s earnings by 1 billion euros a year, the company said in November.
German utilities sell power several years in advance so as to reduce the effect of volatility on their earnings, meaning E.ON will sell some of its electricity at prices set during the recession. German power for delivery the next day averaged 40.85 euros a megawatt-hour in 2009, down 41 percent from 2008, according to broker data on Bloomberg.
E.ON sold about 70 percent of its nuclear and hydro, so called outright power, in central Europe for 2012 as of Dec. 31 last year, down from 90 percent for year-ahead power at the end of 2009, according to slide presentations published on its website. The company sold 30 percent of 2013 power as of Dec. 31, versus 40 percent of 2012 power a year ago.
Adjusted net fell 4 percent last year from 5.1 billion euros in 2009, missing the 5.15 billion-euro average estimate of 20 analysts surveyed by Bloomberg. Profit fell on interest prepayments for Germany’s nuclear fund, asset sales and because of lower earnings at the gas unit.
E.ON asked its suppliers late last year to sell fuel at spot-market rates rather than prices tied to oil. OAO Gazprom, Russia’s gas producer, won’t agree to that, Sergei Komlev, head of contract structuring and price formation at the company’s export division, said Feb. 21.
E.ON, which is renegotiating its long-term oil-indexed gas purchasing contracts with producers, won’t get all of its supply tied to spot prices, Johannes Teyssen, E.ON’s chief executive officer said at a Dusseldorf press conference.
The gas trading business may post a 1 billion-euro loss this year because of the disconnect between oil-indexed and spot market prices, Marcus Schenck, the company’s chief financial officer, said today.
The supply and sales business will present “a high level of uncertainty between 2011 and 2013,” E.ON said in November. The unit will produce “a small profit” in 2013 when the gas unit’s Ebitda rises to 2.5 billion euros from 2 billion euros in 2010, according to a transcript of a Nov. 11 conference call.
Teyssen plans to sell 15 billion euros of assets by the end of 2013 to use about half of the proceeds to reduce debt and spend the remainder on growth in two markets where the utility doesn’t operate. He hasn’t yet identified the countries where E.ON will expand.
E.ON is more than halfway past that asset sale target after agreeing to sell its power grid in central England for 3.5 billion pounds in cash to PPL Corp. and its 3.5 percent stake in Gazprom for 3.4 billion euros.