Germany's E.ON warns of extra plant closures as profit sags

FRANKFURT Tue Aug 13, 2013 2:56pm BST

Gas-fired power plant of German utility giant E.ON is pictured in Irsching near the southern Bavarian town of Ingolstadt April 26, 2013. REUTERS/Michaela Rehle

Gas-fired power plant of German utility giant E.ON is pictured in Irsching near the southern Bavarian town of Ingolstadt April 26, 2013.

Credit: Reuters/Michaela Rehle

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FRANKFURT (Reuters) - Germany's biggest utility E.ON (EONGn.DE) warned it could close more generating plant than expected as plunging wholesale power prices and competition from renewable energy gnawed away at profit.

E.ON and German peers RWE (RWEG.DE) and EnBW (EBKG.DE) have been hit by a mix of record-low wholesale power prices, weak demand driven by recession in Europe and a state-backed expansion of renewables that has hurt profitability of conventional gas and coal-fired plants.

In response, E.ON, which posted a 15 percent drop in first-half core profit on Tuesday, said it has shut down or mothballed about 6.5 gigawatts in power plant capacity (GW).

Chief Executive Johannes Teyssen said the group may close more than the 11 GW previously announced to be under review.

"A sober view of the situation indicates that, at least for 2013 and 2014, no recovery is in sight," he said.

Finnish peer Fortum (FUM1V.HE) said on Tuesday it would also stop power production at one of its coal-fired power plants.

A source familiar with the matter told Reuters a day earlier that RWE, Germany's No.2 utility by profit after E.ON, was planning to shut down or idle thousands of megawatts of plant capacity.

Wholesale power prices in Germany, Europe's largest economy, are down by about a fifth since the start of the year, resulting in losses for coal and gas-fired power plants. On top of that, renewable energy - mostly solar and wind - takes priority in being fed into the distribution grid, reducing the hours gas plants can run.

SURVIVAL

The country's utilities are also suffering from Germany's decision to abandon nuclear power by 2022, a fundamental change to their sector which has prompted them to cut tens of thousands of jobs and shed tens of billions of euros worth of assets.

"At the moment, it's all about how to survive," said Michael Schneider, fund manager at Deka Investment, which holds about 0.5 percent in both E.ON and RWE. "There are too many problems: overcapacities, falling profits and stretched balance sheets."

E.ON and RWE, whose shares recently hit their lowest level in more than 10 years, trade at 9.4 times and 6.2 times 12-month forward earnings, a big discount to the 11.5 times of the European utility index, Datastream shows.

Analysts and investors have pointed to their differing strategies, with E.ON focusing on expanding its business in fast-growing markets including Turkey and Brazil, while RWE is concentrating on its core European market.

Shares in both groups rose as E.ON's first-half results slightly beat expectations, raising hopes among investors the worst could be over.

Earnings before interest, tax, depreciation and amortisation (EBITDA), or core profit, fell to 5.7 billion euros ($7.58 billion), while underlying net income plunged by 42 percent to 1.9 billion.

This was slightly above an average of analysts estimates for EBITDA of 5.6 billion euros and underlying net income of 1.8 billion.

"The numbers per se are not great but they beat expectations, and that's all that matters," a Frankfurt-based trader said.

E.ON also kept its forecast for the current year, expecting EBITDA to fall by up to 15 percent to 9.2-9.8 billion euros, but cautioned it was unlikely to reach the upper end of the outlook range. The group also still expects underlying net income to drop by up to 48 percent to 2.2-2.6 billion this year.

(Additional reporting by Daniela Pegna and Vera Eckert; Editing by Erica Billingham and David Cowell)

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