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E.ON: profit target and shares fall as price rise speculation swirls

'Big Six' supplier E.ON has downgraded its profit target for 2013

E.ON has scrapped its 2013 profit target after announcing that its nuclear power stations have become “barely profitable to operate” due to the weak economic conditions across Europe and a surge in renewable energy.

The news follows speculation in The Sun that the energy giant will increase its gas and electricity prices by 11% in January next year.

E.ON is the only ‘Big Six’ supplier not to have announced price rises this year, but the drop in profits will only add to rumours that E.ON customers are set for an unwelcome surprise in the new year.

‘Prices and margins are under pressure’

In its interim report, the company revealed that its nine-month earnings before interest, tax, depreciation and amortisation increased to €8.8 billion (£7 billion) this year, which is up 35% from the same period last year, while underlying net income increased to €4 billion from €1.5 billion.

According to the German energy supplier, pre-tax earnings for the current year will be between €10.4 billion and €11 billion, with underlying net income between €4.1 billion and €4.5 billion.

However, earnings for the UK stood at £241 million, which is a fall from £257 million during the same period in 2011, while the company recorded a £143 million loss for the third quarter, compared with a profit of £140 million a year earlier.

The organisation has now revealed that it is likely to miss its underlying net income target for 2012 of between €3.2 billion and €3.7 billion and is reviewing forecasts for the next three years, because existing targets are no longer deemed achievable.

Speaking after the publication of the data, Johannes Teyssen, chief executive of EON, explained that dislocations in European energy markets are “stronger than ever” and announced he was considering further cost cuts and asset sales, as well as a review of investment plans.

“Prices and margins are under pressure in every European market,” he explained.

Wider problems

The problem is indicative of the challenges faced by all German power companies, which are struggling to deal with the country’s decision to phase out nuclear power generation by 2022 as a result of the Fukushima disaster in Japan.

A renewed focus on renewable energy generation is posing a further threat to nuclear power, while the eurozone crisis and the economic slowdown in the region are compounding matters.

“Our nine-month results reflect the first successes of the transformation of our company and our ongoing efficiency-enhancement programmes. But they also clearly indicate that we face huge challenges, particularly in our generation business,” Mr Teyssen explained.

“That’s why we’re further optimising our conventional generation portfolio and also exploring whether to close some assets. Where assets are important for ensuring the stability of the power supply, we’re working with system operators and government agencies to find interim solutions.”

Shares fall

The details of the interim report had a direct impact on E.ON’s share prices, which fell 11.5% to €14.64 – the biggest drop in 20 years.

It has raised major concerns among shareholders, including Thomas Deser, a portfolio manager at Union Investment GmbH, responsible for the fund’s 0.71% stake in E.ON.

He told Bloomberg that he considers communication between the company and its shareholders “disastrous”.

“Even for the dividend there is no reliable lower limit. Shareholders don’t play the same important role for E.ON as bond holders and rating agencies do,” he added.

The next step

E.ON is the only one of the ‘Big Six’ energy suppliers that has not increased energy prices for UK customers, but the latest announcement is likely to raise concern among its five million customers in Britain.

Though the organisation has a price freeze on its fuel costs that is set to remain in place until the new year, dwindling profits and a weak mid to long-term outlook suggest that raising prices may be the only viable solution to its problems.

This is particular pertinent considering the fortunes of its rivals; only this week, SSE announced a 38% rise surge in first half profits, largely due to improved performance by its energy supply arm, which raised domestic gas and electricity prices by an average of nine per cent in August.

On the back of this, Scottish Hydro Electric, which owns SSE, raised the interim dividend by 5% from 24p to 25.2p per share, and the company is now targeting a full-year increase of at least 2% more than RPI inflation, to around 84p, for 2012/13.

Despite this, the company’s chairman Lord Smith said that energy market conditions remain ‘challenging': “The prices achieved for generating electricity have been weak, and higher gas and non-energy costs unfortunately had to be reflected in the increase in household energy prices which SSE implemented,” he added.

Though EON has so far refrained from raising prices, it may only be a matter of time before its five million UK customers receive a letter through the post.