Utility fossils look beyond Europe for a buck

European power giants E.ON and Enel are looking abroad as distributed generation continues to lay waste to conventional business models across the continent.

Reuters

E.ON and Enel, two of Europe's largest power utilities, said overnight they plan to shut more plants and cut costs, joining rivals in warning that the industry crisis will weigh on profits for years to come.

Utilities across Europe have been taken by surprise by a surge in output from renewable energy sources, mainly solar and wind, making many fossil-fuelled thermal plants redundant and leading to a collapse in wholesale power prices.

E.ON, Germany's largest utility, nearly halved its dividend to 0.60 euros ($US0.83) per share on 2013 earnings, down from 1.10 euros, and said it will shut down 13 gigawatts of capacity, equivalent to about 13 nuclear plants and more than a quarter of its entire European capacity.

Italy's biggest utility Enel, which also owns 92 per cent of Spanish group Endesa, said it would mothball 8 GW of capacity in its home market and Spain, and trim its dividend to 0.13 euros per share from 0.15 paid on 2012.

So far some 50 GW of gas-fired capacity in Europe has been closed or mothballed by 10 of the continent's biggest utilities in response to weak demand and the rise of renewable energy.

"Our conventional power plants are operating for fewer and fewer hours," E.ON's chief executive Johannes Teyssen told reporters last night.

"As a result, we, but also more and more other energy companies, are decommissioning conventional power plants before the end of their ... operating life," he said.

Some 15 years after liberalisation of Europe's power markets, companies have been left facing the need to find a new business model due to increased regulation and a changing energy mix which has become increasingly biased towards low-carbon types of electricity generation.

The crisis caused French group GDF Suez to book a 15 billion-euro charge on its power business this month, while German rival RWE posted its first net loss since 1949.

E.ON said it expected earnings before interest, tax, depreciation and amortisation of 8-8.6 billion euros ($US11-$US11.9 billion) this year, marking the third consecutive year of falling profits.

In its new 2014-2018 business plan, Enel said it expected core earnings before interest, tax, depreciation and amortisation  to fall back to 15.5 billion euros, having risen in 2013 to 17 billion euros from 15.8 billion in 2012.

Looking abroad

One way for Europe's utilities to escape relatively weak energy demand on the continent is to expand abroad, a strategy pursued by both E.ON and Enel.

The Italian state-controlled utility plans to invest 25.7 billion euros in 2014-18, of which 57 per cent will go to growth markets. It will also plough 6 billion euros into green energy unit Enel Green Power.

"Emerging markets have become the key drivers of global economic growth ... In mature markets the conventional model is under siege from distributed generation," Enel's chief executive Fulvio Conti said.

The shift of focus to emergency markets and green energy is expected to take core earnings to 18 billion euros by the end of the five-year plan, Conti told analysts.

E.ON, too, is expanding abroad, mainly in Turkey, Brazil and Russia, where it has invested nearly 10 billion euros in recent years though it has warned of currency headwinds in these markets, caused by political uncertainty and a massive outflow of investor money and markets outside Europe still account for just 6 per cent of its core profit.

Adding to their problems many of Europe's utilities are still trying to shake off the legacies of an acquisitions mania that gripped the sector before the financial crisis in 2008, and are now having to sell assets and find cost savings to help cut debts and preserve their investment grade credit ratings.

With plans to raise 4.4 billion euros from asset sales and make cost savings of 5.8 billion euros in 2014 alone, Enel said yesterday it would at least be able to raise its dividend payout ratio, to 50 per cent of net profits from 40 per cent.

Deutsche Bank said in a note that while Enel's overall results were in line with market expectations, the news on dividend policy and cost cutting was positive.

"Also positive (is the fact) they remain committed to deliver on disposals," the note said.

Enel stock was up 1.2 per cent at 3.87 euros in late trading, when E.ON was up 3.24 per cent at 13.86 euros and the Stoxx Europe 600 utilities sector index was up 0.18 per cent.

Originally published by Reuters. Reproduced with permission.

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