E.On makes hay while the rain pours
Despite the economic downturn, E.On expects to report strong results for 2008 and maintain the momentum in 2009
No-one is immune to the economic crisis. But large integrated utilities, such as those operating across Europe, are well placed to weather the storm. The strength of Europe's utility sector was illustrated during the difficult last four months of 2008, when the utilities sub-section of the Dow Jones STOXX 600 Index, comprising companies from across Europe, outperformed the main index by 10.7%. The success relates to the nature of the sector: sales are generated by demand for vital services, such as electricity and heat. Prices for those products tend to remain relatively stable.
In 2009, the global situation looks even worse, yet the sector will continue to outperform the overall market, according to Natixis Securities, a brokerage, which picked E.On as one of its three favourite utility stocks for 2009. Credit Suisse also named E.On as one of its three picks in the sector.
Indeed, E.On made a flying start to the year. While the debt-capital markets remain closed to all but a few, it had refinanced €4.5bn ($3.5bn) of debt before the end of January. It also managed to take advantage of lower interest rates, which more than offset the rise in spreads of such corporate bonds over the benchmark rates. The yield on its new benchmark eurobond stands at about 4.9%, which compares favourably with the average interest rate of about 5.4% the firm secured for its financing programme that began in 2007.
On 10 March, when its announces its full-year results for 2008, the firm will present a new business plan, which will take into account the effect of the deepening economic crisis on the markets in which it operates. Analysts expect E.On to keep a tighter reign on capital expenditures, as well as unveil some cost-cutting measures. The announcement about the new business plan, made during the November release of its third-quarter results, which were surprisingly positive, left some analysts with mixed impressions.
E.On's earnings before interest and tax (ebit) during the quarter came to €7.7bn, up by 7.8%, while net profit was up by 5.8% to €4.46bn – roughly in line with expectations. Analysts noted the healthy returns from the Central Europe division, marred slightly by a disappointing performance at its Spanish operations.
Following these results, E.On reiterated its guidance for the full year of ebit growth of 5-10%, despite the tough fourth-quarter conditions – although it is now less likely to be at the upper end of that range – and restated its 2010 ebit target of €12.4bn and its aim of increasing dividends by 10-20% in this period. "The outlook for 2009 is not so bad, despite lower commodity and oil prices," says Ulrich Huwald, an analyst at German bank MM Warburg.
However, there are some signs of trouble. E.On insists it is not facing liquidity problems, but has decided to suspend the final €0.5bn of its €7.0bn share-repurchase programme. "E.On no longer appears quite as immune to the crisis as most of its competitors," Natixis said.
Another problem will be the forced disposal of assets at a rotten time in the markets. The European Commission closed an antitrust case against E.On in November following a commitment from the firm to sell about 20% of its German generating capacity, around 4.8 gigawatts (GW), and its ultra-high-voltage (UHV) distribution network. The Commission argues that separating energy companies from their distribution networks is crucial for competition.
E.On is making good on its promise: in December, it signed deals with Belgium's Electrabel and Germany's EnBW concerning 2.2 GW of installed capacity. The Electrabel deal was a swap of assets, allowing it to enter and gain a 12% share of the Belgian electricity market. In January, it completed a €4.5bn asset swap with Norway's Statkraft. E.On is now the sole owner of E.On Sverige, in which Statkraft had held 44.6%, and also received a hydropower station in Sweden. In return, Statkraft obtained power stations in Sweden, Germany and the UK, as well as E.On shares worth about €2.2bn, giving it a 4.17% stake in the German firm.
Analysts say disposals of the remaining 2.1 GW of generating capacity will have to take the form of asset swaps, although there are few groups interested in German assets at the moment. Offloading the €1bn UHV network will be a tougher sell: it cannot sell to a German firm and other potential buyers, such as owners of other European networks and investment funds, all have fairly high debt levels at a time when the debt markets are all but closed. E.On does at least have a 24-month disposal deadline, by the end of which market conditions may have improved.
January's gas dispute between Russia and Ukraine, which halted flows to Europe (PE 2/09 p4), may affect E.On's 2009 results – the head of the firm's gas subsidiary said it incurred "considerable expense" from the dispute. It may also push the firm to lessen its dependence on Russian gas, which accounted for 26% of supply in 2007.
Despite the uncertain economic environment, E.On intends to spend upwards of €4bn through to 2012 to diversify its gas-supply sources. "The firm's investment plans stand in contrast to those of many others that have instead chosen to scale back spending until the economy and financing environment improve," says Lawrence Poole of Global Insight, a consultancy.
It plans to increase international gas production; expand its gas-storage capacity by 45%, to 8bn cubic metres (cm); and boost its liquefied natural gas import capacity – it has 3bn cm/y of capacity booked at Rotterdam's Gate terminal from third-quarter 2011 and is planning a 10bn cm/y domestic terminal at Wilhelmshaven.
The disposal of assets for the Commission, as well as those it deems non-strategic, such as Thuga (a group comprising almost 100 energy and water utilities in Germany and Italy), will also help fund the expansion of E.On's nuclear business overseas – the German government plans to close all reactors by 2021 and has no plans to build new ones. E.On and RWE, its main domestic rival, have joined forces to build and operate at least 6 GW of nuclear capacity in the UK, where the government last year gave the go-ahead to build a new generation of plants.