EON AG, Germany’s largest utility, will eliminate more than 10 per cent of its workforce and reduce dividends after first-half profit plunged because of the cost of shutting nuclear reactors. The shares fell by a record.
Adjusted net income, the gauge EON uses to calculate its dividend, fell to ¤933 million ($1.29 billion) from ¤3.26 billion a year earlier, the Dusseldorf-based company said. The utility, which may cut as many as 11,000 jobs, reported its first quarterly loss in 10 years of ¤382 million.
A public backlash following the disaster at Japan’s Fukushima Dai-Ichi plant drove Germany to announce plans to close all its reactors. Even before the costs of shutting plants, EON and RWE AG (RWE), the country’s two largest atomic power operators, were facing a nuclear tax intended to net the government about ¤2.3 billion to trim the budget deficit.
“The short-term outlook is distinctively unimpressive, but the medium-term looks okay,” Lueder Schumacher, an analyst at UniCredit SpA, said in a note to investors today. “EON went all-out on nuclear provisions. In this environment this is still not going to be received well.”
EON dropped ¤1.705, or 11 per cent, to ¤13.82 in Frankfurt trading, the biggest one-day decline since the shares started trading in August 1992.
Dividend Revision
The utility plans to cut 9,000 to 11,000 jobs to counter falling earnings and reduce spending by ¤1.5 billion a year by 2015. EON slashed its full-year dividend target to ¤1 from a promised payout of at least ¤1.30 for 2011 and 2012. Full-year adjusted net income in 2011 will be ¤2.1 billion to ¤2.6 billion, it said.
“We will be very cautious and not rush ahead,” Chief Executive Officer Johannes Teyssen said on a conference call today. Job cuts will be “essentially administration, but there are also operative segments concerned.”
About 4,500 employees are linked to EON’s nuclear power- plant business, company spokesman Carsten Thomsen-Bendixen said by phone yesterday.
“My objective is to create a new EON which is quicker and leaner, and which successfully operates globally with considerably lower costs,” Teyssen said in a statement. “We cannot afford -- not only, but particularly in Germany -- any unnecessary management levels, processes and duplication of work.”
Hard on Employees
European companies including Royal Bank of Scotland Group Plc and Barclays Plc have announced job cuts this month after rising costs eroded earnings.
“This is hard for the people affected but necessary to improve EON’s capability to drive the company forward in the next years,” Bernhard Jeggle, an analyst with Landesbank Baden- Wuerttemberg AG, said by phone. He recommends investors buy EON stock.
The planned permanent closure of nuclear facilities and a recently imposed nuclear-fuel tax cut first-half earnings before interest, tax, depreciation and amortisation by about ¤1.9 billion, the company said. EON is also struggling to stem losses from long-term gas procurement contracts and boost profit at its power-trading business.
The company’s energy-commodities trading unit reported an operating loss of ¤151 million in the first half as it paid more for non-fossil-fuel power.
The loss occurred because of higher prices paid to its generation arm for non-fossil power and lower achieved prices.
RWE Costs
RWE, scheduled to shut the first of five reactors in 2016, said yesterday that costs of earlier-than-expected closures, as well as the expense of the nuclear-fuel tax, reduced profit by about ¤900 million in the first half. Recurrent net income fell by 39 per cent to ¤1.67 billion.
Teyssen, who took over as EON’s CEO in May 2010, is trying to cut borrowings by selling assets. Net debt amounted to about ¤33.6 billion as of June 30, compared with ¤37.7 billion in 2010, and financial liabilities were almost half what they were a year earlier at about ¤16 billion, EON said.
EON increased debt after buying power plants from Spain to Siberia as national energy markets began to open. EON completed purchases of ¤11.5 billion from Enel SpA (ENEL) and Acciona SA (ANA) in 2008 and ¤4.1 billion in Russia in 2007.
“We’re on schedule in identifying new growth regions in other parts of the world,” Teyssen said, “but the energy future has to be financed. So we need to be even more selective in our investments and even more aggressive in our efforts to cut costs.”
Capital Investment
The company spent ¤2.5 billion on power plants and other energy assets in the first half, a drop of ¤1.2 billion from capital expenditures a year earlier.
Profit at EON’s gas division slumped because of lower sales in the wholesale business. The utility has said oil-linked procurement contracts are putting pressure on margins because wholesale gas prices are so low. Weather also trimmed sales, the company said.
“Negotiations with producers to adjust procurement prices have been successful, but do not yet encompass the entire portfolio and in 2011 only partly offset negative margins,” EON said in the statement.
