Welcome to the New EON, Where Plunging Power Won't Matter

  • Utility plans to pay dividend of 40%-60% of underlying income
  • EON to list 53% of Uniper after June shareholder meeting

Michael Sen, EON SE’s chief financial officer, is grateful not having to keep checking how much lower European power, gas, coal and carbon prices are trading since the last time he looked.

Instead, he’s helping to build a revamped version of Germany’s biggest utility focusing on renewables, networks and retail consumers. The company is moving away from the traditional and outdated integrated utility model where one supplier generates electricity at huge plants, ships it on its own network and sells to household clients. Most of EON’s conventional power-plant business that weighed heavily on earnings as wholesale rates crashed may be listed on the Frankfurt Stock Exchange as early as August.

Since the split that created its Uniper unit on Jan. 1 was first announced in November 2014, EON shares have slumped 36 percent, even more than the 24 percent drop in German wholesale prices. Even so, Sen is convinced the separation is strategically sound and is targeting an annual increase in earnings per share for EON of 5 to 10 percent. Uniper, on the other hand, will reduce its capital spending to a “necessary minimum,” and will seek to make disposals of at least 2 billion euros ($2.3 billion) by 2017. It will also cut costs to “substantially” reduce its 4.7 billion-euro debt load.

“I’m relieved not to be dependent on volatile commodity prices diluting earnings any longer and to get rid of a lot of risk exposure on the commodity side,” Sen said Tuesday in an interview in London, where he and other executives presented the new look company to investors and analysts. The breakup “makes even more sense because of the tremendous fundamental structural change we see in the industry.”

RWE, Vattenfall

The utility’s decision to spin off its fossil-fuel and hydro plants and trading was the first and most radical response to Germany’s shift toward building an energy system based on wind and solar generation. Exactly a year after EON’s announcement, RWE AG followed suit and announced it too was splitting. Vattenfall AB this month agreed to sell its lignite plants in eastern Germany to a Czech power producer if approved by its Swedish state owner.

The traditional “plant-to-plug” utility model is “dead,” Sen said.

EON plans to distribute 53 percent of Uniper’s shares to existing shareholders, giving one Uniper share for 10 EON shares, according to a 187-page spinoff report. It will eventually sell the remaining stake, too.

“We’ve given ourselves a period of roughly two years, also giving a clear signal to the market that we believe in the strength of Uniper,” Sen said.

While EON will avoid the biggest growth markets in renewable energy, China and India, it will focus investments in Europe and the U.S.

Capital spending on wind and solar will increase by 300 million euros to 1.3 billion euros in 2016 and remain stable in the next few years, Sen said. That compares with a total of 3.4 billion euros, also including networks and the retail business.


Uniper’s payout will be about 200 million euros for 2016, with its dividend linked to free cash from operations after that.

“The starting point is admittedly low, however we expect this to increase significantly over time,” Deepa Venkateswaran, an analyst at Sanford C. Bernstein & Co. said Wednesday in a note to clients.

EON plans to distribute 40 to 60 percent of underlying net income to shareholders. Briefings at Tuesday’s capital market day suggest a combined dividend per share of 25 euro cents for 2016, “slightly below our expectations,” analysts at Jefferies International Ltd. led by Ahmed Farman, said Tuesday in a report. That would be half of this year’s payment.

“The very bad commodity environment left its mark and our ability to invest will not be as strong as we hoped for 480 days ago when we started our journey, but also our dividend will obviously reflect our new reality,” Chief Executive Officer Johannes Teyssen said Tuesday in an interview with Bloomberg television. “We believe we’ve got the right balance.”

While EON will seek to provide stable returns, Uniper will have the potential to benefit but also the risk from swings in commodities from electricity to oil and freight. The company will attract investors “looking for a basic return with upside potential,” Chief Executive Officer Klaus Schaefer said Tuesday in an interview in London.

EON’s shareholders will be “totally different” from those of Uniper as about two thirds of its earnings will be generated from regulated and long-term contracted business, Sen said.

“That gives stability, resilience, predictability for the investor, and visibility,” he said. “We are in very stable countries from a sovereign risk perspective.”

Morgan Stanley’s Office

As Sen and Teyssen presented profit forecasts, investment plans and dividend policy at Morgan Stanley’s Canary Wharf office, German and French power rates for 2017 soared more than ever before after French President Francois Hollande pledged a minimum carbon price as well as some reactor closures.

The French contract jumped as much as 11 percent, while its German equivalent climbed as much as 7.5 percent, according to broker data compiled by Bloomberg. They both fell 19 percent last year, a record.

So where are prices headed? Don’t ask the boss.

“EON will hardly be exposed to any commodity business in the future and thus I would say I’m probably the wrong guy to speculate,” Teyssen said in the television interview. “We are on the consumer side, on the client side.”

Before it's here, it's on the Bloomberg Terminal.