German utility E.ON posted its first ever quarterly loss and is laying off up to 11,000 workers. Compatriot RWE is up the creek following Frau Merkel’s decision to abandon nuclear power. And investors are no longer deeming these utilities a ‘safe haven’ in turbulent financial times. What is going on?
Germany’s biggest utility has posted a net adjusted loss of €382m ($543m) during the second quarter of 2011. E.ON’s half-year profits have fallen 45 per cent and expects net income to be down to €2.1-2.6 billion this year – a drop of over 70 per cent.
Current market conditions – including overcapacity, technological change and government intervention – are making life difficult for the foreseeable future, the Duesseldorf-based company says. The planned permanent closure of nuclear facilities and the nuclear fuel tax has slashed first-half earnings by €1.9 billion.
Power generation fell by 3 per cent to 132.6 billion kWh during the first half of 2011 due to the enforced shutdown of its Unterweser and Isar 1 nuclear plants. E.ON operates six nuclear plants, with the first due offline in 2019.
By 2015 E.ON plans to generate 25 per cent of its revenue outside Europe, up from around 10 per cent today. Main targets for growth are building wind farms in North America and gas power plants in Russia. At €35 billion, however, E.ON is heavily indebted as a result of major acquisitions in recent years, and rating agency Standard and Poor’s (S&P) has put the company’s credit outlook on negative.
In order to decarbonize its generation and invest in growth areas, CEO Johannes Teyssen says E.ON will cut around 9,000-11,000 people – around 14 per cent of its workforce.
Through its co-operation with Gazprom in building the Nord Stream pipeline that will transport Russian gas directly through the Baltic Sea into Germany, E.ON is well positioned in the gas market, where analysts see the biggest growth potential in Germany’s fossil fuel power generation sector.
However, E.ON’s gas trading branch is a loss-maker because Gazprom insists on selling its gas in long-term oil-indexed contracts which, at low spot market prices, force it to sell gas at a loss. E.ON said that its gas trading loss in 2011 could be around €1 billion.
Germany’s second largest utility recorded a half-yearly profit slump of 40 per cent and recorded a net loss of €229 million in the second quarter of 2011, down from a €486 million net profit in the same period last year. RWE cites €900 million of decommissioning and nuclear fuel tax costs as a major reason why its operating profit fell 33 per cent to €3.3 billion.
The shutdown of RWE’s Biblis nuclear plant following Fukushima has reduced power output by 7 per cent compared with last year. The early closure of reactors resulted in an earnings shortfall, because RWE sold forward power that should have been produced in its two closed reactors. To meet its supply obligations the Essen-based firm has had to produce that electricity in more expensive plant or buy power on the market.
RWE operates five of Germany’s 17 reactors, with the first scheduled to close in 2016. RWE could be hit harder by the nuclear phase-out because it is less active in other markets than E.ON and relies heavily on nuclear and coal generation, which make up over 70 per cent of the company’s overall power generation share.
RWE has also been downgraded by rating agencies (Moody’s and S&P). RWE relies on lignite and hard coal for over 50 per cent of its power generation output. This also makes RWE the biggest carbon emitter in Europe and exposes it to the European Emissions Trading Scheme (ETS) more than its competitor.
RWE is weak in gas-fired and renewable generation, with portfolio shares of 20 and 5.5 per cent respectively. RWE wants to increase its renewable generation to around 30 per cent by 2025. However, RWE has debts of €27 billion and its balance sheet will struggle to shoulder much more of a burden.
RWE is looking to a partnership with Gazprom, which has announced its interest in acquiring power generation assets in Germany. Last month RWE said it had it secured exclusive talks with Gazprom that could lead to a power joint venture in Germany, Britain and the Benelux.