EON SE, Germany’s largest utility, will break itself up, spinning off fossil-fuel power plants into a separate company to focus on renewable energy.
The plan is the most radical response yet to Germany’s unprecedented switch to wind and solar power. The so-called energy shift has forced EON and its peers to close nuclear reactors and undermined power prices, decimating the profitability of traditional utilities.
Chief Executive Officer Johannes Teyssen said other utilities would have to consider similar moves as the industry adjusted to the massive changes in the way electricity is generated and consumed. The company expects to complete the split in 2016.
“We are the first to resolutely draw the conclusion from the change of the energy world,” Teyssen told reporters in Dusseldorf today. “We’re convinced that energy companies will have to focus on one of the two energy worlds if they want to be successful.”
There will be pain along the way. EON also announced it will write down the value of assets by 4.5 billion euros ($5.6 billion), leading to a substantial full-year loss. The Dusseldorf-based company set dividend payments for this year and next at 50 cents a share, down from 60 cents for 2013.
Even so, the shares jumped to its highest in more than four months on the plan, which Teyssen outlined to investors and reporters today.
EON’s plan “could set a blueprint for other utilities” including German rival RWE AG, analysts at Sanford C. Bernstein & Co. led by Deepa Venkateswaran said in a note today. “It will create more strategic clarity for EON’s shareholders and will help unlock more value for the stable downstream businesses.”
RWE has no plans for a similar move and will continue to operate “along the complete value-chain,” spokeswoman Annett Urbaczka said today by e-mail.
The spinoff will include conventional power generation, global energy trading, exploration and production. That will leave the company to concentrate on renewables, distribution and marketing to households and consumers.
The nuclear business will also be transfered, meaning the new company will have to manage the costs of running down EON’s fleet of nuclear reactors.
“EON limits its liability to the spinoff” Thomas Deser, a fund manager at Union Investment, one of EON’s 10 biggest shareholders, said by phone from Frankfurt. “It’s a smart approach.”
The share jumped 4.2 percent to 14.86 euros in Frankfurt, the highest close since July 24. The volume of shares traded was three times the three-month average.
The 4.5 billion-euro impairment charge, booked on its southern Europe and generation assets, will result in the company reporting a “substantial” loss this year, though its full-year underlying net income target still holds, the company said in a statement yesterday.
Germany’s shift toward renewables from nuclear energy has led to a surge in wind and solar generation, cutting power tariffs already weakened by slow European economic growth.
The new company, in which EON will continue to hold a minority stake, will employ about 20,000 people, or about one-third of the utility’s current workforce.
JPMorgan Chase & Co. is advising EON on the spinoff, according to a person familiar with the matter. A spokeswoman for the bank declined to comment.
While it will have about the same share of today’s pension obligations, it will have no liabilities and will “comfortably” obtain an investment grade rating, Chief Financial Officer Klaus Schaefer told analysts on a call.
EON will transfer a majority of capital stock in the new company that will include the Russian assets as well as the Brazilian Eneva SA venture and is to be based in Germany’s Rhine-Ruhr region to shareholders.
It plans over time to sell down its remaining stake, adding to proceeds gained from the sale of its businesses in Spain and Portugal to Macquarie Group Ltd. for an enterprise value of 2.5 billion euros, it said.
EON is also exploring the disposal of assets in Italy and has put its exploration and production operations in the North Sea under strategic review.