E.ON Triples Profits and Shakes Hands with Gazprom

on Aug 15, 2012
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E.ON (EOAN:BER), Germany’s biggest utility company, saw its profits more than triple for the first half of the year. The company registered a net profit of €3.13bn (£2.45bn) up from €948m (£604m) for the same period last year. Revenues rose 23 per cent to €65.4bn (£51.2bn) and first half-year earnings before tax, interest, depreciation and amortization rose 55 per cent to €6.7bn (£5.24bn). Earnings per share increased by 325 per cent to €1.53 (£1.20). According to E.ON, Expected net income is to reach anywhere between €4.1bn (£3.2bn) and €4.5bn (£3.5bn) in 2012.

The numbers are consistent with E.ON’s forecasts and are a result of the deal with Gazprom (GAZP:MCX) on long-term gas supply. The Russian energy group finally agreed to cut their prices for gas supplied after negotiations prolonged for years. No details were given but E.ON chief executive Johannes Teyssen said it represented “a good result for both sides” and would strengthen Eon’s “longstanding successful partnership with Gazprom”. The agreement was backdated to the last quarter of 2010 and E.ON said that the settlement should have a positive impact of about €1bn (£783m) on the half-year results. Not only E.ON but also its rival RWE (RWE:FWB) and Polish PGNiG spent four years trying to convince Gazprom to agree on certain discounts. Earlier this year the Russians reached agreement on a 10 per cent price cut with another group of clients, Italian oil & gas company ENI (ENI:BIT) being one of them.

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!m[](/uploads/story/253/thumbs/pic1_inline.png)The timing could not be better as the utility company saw heavy losses in 2011 after Germany decided to close eight of its seventeen nuclear power plants and pledged to speed up the closure of the remaining nine. The company was already suffering from the worsening economic situation in Europe and the drag in gas prices. E.ON warned that demand for energy in Europe is falling and “We’ll therefore further optimise out conventional generation portfolio, reduce costs, enhance our assets’ flexibility, and even explore closing assets where necessary”.

The renewables side of business for the company also displayed improved health, driven mainly by an increase in installations of solar plants and wind farms in the US. E.ON’s renewable division reported sales of €1.2bn (£939m) or a 6 per cent rise.
The strongest performance however was shown by the Optimization & Trading Segment. This reflects the company’s continued efforts to optimize its generation fleet and, more specifically, to alter its gas hedging strategy. The increases in generating capacity led to higher sales in the Russian as well as in the Renewables segment. The lower sales from the Generation segment are mainly due to the mandatorily shut down power stations in Germany.

In the UK, sales rose by 14 per cent to £4.09bn, which, according to E.ON, is to be attributed mainly to favourable forex conditions for the GBP:EUR pairing. But the recently announced tripled net profits leave many customers wondering whether the price they are paying is indeed fair. After all, wholesale prices are far below their peaks, which were proffered up as the route cause of why end prices for consumer had to be increased and based on recent changes to these costs costs, E.ON is now able to achieve greater margins. The question remains whether these changes are reflected objectively and timely into what consumers have to pay. For now the company has committed to a price freeze on all of its standard products to the end of 2012.

In general E.ON is putting efforts into reinventing itself as a more diversified energy group with greater exposure to emerging markets as opposed to only being limited to Europe. Proof of that is a joint venture commitment in Brazil with the purpose of building gas and coal-fired power plants. The company is also looking into opportunities in India and Turkey.

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