German utility giant E.ON to split into two in major restructuring

Germany's largest utility E.ON SE said yesterday that it would split its $122-billion business into two, with one focusing on renewable energy and the other on conventional energy, in a drastic response to rapid changes in the global energy market.

E.ON will focus on renewables, distribution networks, and customer solutions and combine its conventional generation, global energy trading, and exploration and production businesses in a new, independent company, a majority of which will be spun off to E.ON shareholders, the company said in a statement.

E.ON's supervisory board chairman Werner Wenning said that the decision would give the company's employees and investors clear prospects in two strong companies that are viable for the future.

''We are convinced that it's necessary to respond to dramatically altered global energy markets, technical innovation, and more diverse customer expectations with a bold new beginning. E.ON's existing broad business model can no longer properly address these new challenges.''the company's CEO  Johannes Teyssen said.

As part of the overall strategy, E.ON will divest its non-profitable businesses in Spain and Portugal to Australian investment firm Macquarie for approximately €2.5 billion (See: German utility E.ON close to selling Spanish operations for $3.1 bn).

The company is also exploring the disposal of its business in Italy as well as conducting a strategic review of its exploration and production business in the North Sea.

The new strategy will not be accompanied by a job cutting programme, E.ON said. The parent company with its focus on renewables, distribution networks and customer solutions will retain about 40,000 employees while the spin-off new company running conventional businesses will be manned by the remaining 20,000.

E.ON expects to complete the spin-off in 2016 after its approval by the company's shareholders.

The company plans to increase its capital expenditure for the next year by about €0.5 billion compared to the earlier planned €4.3 billion.

Particular emphasis will be on expanding its wind business in Europe and in other selected markets, in addition to strengthening its solar business and improving its energy distribution networks in Europe and Turkey, E.ON said.

Dusseldorf-based E.ON is one of the major public power utilities in Europe and the world's largest investor-owned energy service provider engaged in power generation and distribution as well as natural gas business. Its subsidiaries include E.ON Ruhrgas, E.ON UK, E.ON Svergie and E.ON Russia. The company has around 33 million customers.

In the year 2013, fossil fuel produced 57 per cent of total power in Germany, nuclear power was 15 per cent and renewable energy accounted for 24 per cent. Over the years, the country's power sector has been hit by weak energy demand, low wholesale power prices.

Two of the company's six nuclear power plants in Germany have been shut down following the federal government's nuclear moratorium post the 2011 Fukushima disaster.

The four operating plants have to be gradually phased out by the end of 2022. The share of nuclear power in Germany has declined from 27 per cent to 15 per cent in the last 10 years, substituted with a rise in renewable energy from wind power, biomass and solar power.

E.ON's coal-based power plants have a capacity of around 22.4 gigawatt (GW) and the company has set a target of reducing carbon dioxide emissions by half by 2030 compared with the levels of 1990. Oil and natural gas based power plants have a capacity of about 27.4 GW.

In the wind energy sector, E.ON operates onshore wind farms with an installed capacity of about 4,000 MW in Europe and the US including the 782 MW plant in Texas, one of the world's largest onshore wind farms.  In addition, the company is the world's third-largest operator of offshore wind farms and has a 30-per cent interest in the 630-MW London Array, the world's largest offshore wind farm.

The company also has oil exploration and production activities in the North Sea, UK, Algeria and Russia.

For the year 2013, the company reported a net income of €2.5 billion on total sales of €122 billion. E.ON's total assets stood at around €131 billion as at the end of 2013.

E.ON plans to offer the company's stock to its shareholders avoiding sale of shares in the open market.

The company expects to report impairment charges of about €5.2 billion in 2014, including the €700 million already disclosed, primarily on account  of its operations in Southern Europe and loss-making generation assets.

Nevertheless, E.ON still confirmed its 2014 outlook of earnings before interest, taxes, depreciation and amortisation (EBITDA) between €8-8.6 billion and underlying profit of €1.5-1.9 billion.

The company's net debt is around €31 billion and said that would dispose of its minority stake in the new company over the medium term to bolster its finances.

E.ON's supervisory board had approved a proposal to pay a dividend of 0.50 euro per share for 2014 and 2015, down from 0.60 euro paid for 2013.