August 13, 2013 8:11 am

Eon warns of more plant closures as first-half profits fall 42%

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Eon blamed a decline in European wholesale power prices and the boom in renewable energy for a fall in first-half earnings as capacity utilisation in its fossil power generation business declined.

The German utility reiterated that it would consider shutting or mothballing fossil power plants in Europe in response to what it describes as “interventionist” energy policies and regulations that subsidise and prioritise renewable energy.

Johannes Teyssen, chief executive, told shareholders: “Much will depend on future policy decisions, which largely can’t be foreseen. A sober view of the situation indicates that, at least for 2013 and 2014, no recovery is in sight.” 

Weak demand linked to recession in Europe has caused wholesale power prices to fall. Meanwhile, the prioritisation of solar and wind energy in the grid has lessened demand for coal and gas power generation outside peak load periods, meaning some plants must operate at a loss or face closure.

Eon’s gas storage business is also losing income because there is less need for large quantities of gas to be withdrawn from storage facilities. The share prices of Eon and its domestic rival RWE have fallen to their lowest in a decade.

“These adverse factors will continue and, according to our analysis, may actually get worse,” Mr Teyssen said.

“That’s why I announced at the start of the year that we’re responding . . . by cutting costs and enhancing efficiency . . . Increasingly, however, we also must consider closing and mothballing some assets.” 

Eon last month announced it would mothball a gas-fired power plant in Malženice, Slovakia, which entered service two years ago, as it cannot operate profitably in the current environment.

“Unless the business environment of the energy industry in our core European markets changes tangibly, other plant closures will be unavoidable,” Mr Teyssen said.

Eon’s underlying net income fell 42 per cent to €1.9bn in the first half, compared with the same period a year ago, exceeding analysts’ expectations of roughly €1.8bn in underlying net income. The stock gained 2.1 per cent to €12.50 on Tuesday. Nathalie Casali, an analyst at JPMorgan, said Eon’s headline figures were strong but its results were flattered by one-time effects.

Eon is attempting to offset its domestic fossil power problems by expanding outside traditional European markets into countries such as Brazil and Turkey. It is also investing heavily in renewables.

Although management described the European environment as “stormy”, it said on a conference call that Eon saw no need to raise fresh capital. Eon said it was making progress with its divestment programme.

The company continues to expect full-year underlying net income of between €2.2bn and €2.6bn.

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