“We’re on a path from being a traditional integrated utility toward becoming a developer of customer-centric energy solutions. This is our objective and mindset as we enter new markets and regions.” This was CEO Johannes Teyssen’s overview of E.ON SE’s transformation as he spoke at the company’s Annual Shareholders Meeting in Essen.
Teyssen reminded the several thousand shareholders in attendance of the strategy the company had announced in 2010, which he said had proven to be the right one, even in a harsher business environment. E.ON is implementing the strategy swiftly and on schedule. As part of its effort to focus on businesses and markets that are viable for the future, since 2010 E.ON has reached agreements to sell assets worth more than €17 billion and is currently aiming for €20 billion. At the same time, E.ON is systematically expanding its new growth businesses. In the last three years E.ON has commissioned 26 onshore and 2 offshore wind farms in North America and Europe. Together with its existing portfolio, these additions rank E.ON among the global market leaders in offshore wind. E.ON is currently commissioning the world’s largest offshore wind farm in the outer Thames estuary, installing turbines at Karehamn offshore wind farm in Sweden, and beginning installation work at Amrumbank wind farm in the German North Sea. E.ON has also established a broad and strong platform in distributed energy solutions. In the last three years it has installed numerous micro generating units for residential and business customers and is Germany’s market leader in combined-heat-and-power (CHP) units for commercial and industrial customers. Recently founded E.ON Connecting Energies, which specializes in CHP solutions for international customers with multiple sites, has concluded its first contracts.
In expanding its business outside Europe, E.ON will aim for “smart, responsible growth that combines ambitiousness and prudence,” Teyssen said. E.ON entered the Brazilian and Turkish markets in 2012 by joining forces with strong local partners. Enerjisa, E.ON’s joint venture with Turkey’s Sabanci Holding, recently made successful bids for two regional utilities in a government auction to privatize the country’s power networks, achieving an early milestone toward reaching its ambitious growth targets in Turkey’s energy market. When the privatization process in both regions is complete, Enerjisa will have 9 million customers; it aims to have 7.5 gigawatts of generating capacity in operation by 2020. E.ON and EBX of Brazil agreed to expand their strategic partnership. The generation projects the two companies are developing jointly will deliver earnings streams starting in the second half of this decade. The first jointly developed asset is scheduled to enter service this autumn.
E.ON began in the middle of the previous decade to lay the foundation for entering new businesses and regions, Teyssen emphasized, adding that E.ON’s businesses in renewables and Russia have developed so well in recent years that they are generating nearly €1 billion in earnings. E.ON’s exploration and production business will easily surpass this threshold this year. “Now is the right time to build on these new sources of earnings to create growth potential for the second half of this decade” Teyssen said, adding that this will require resolute cost discipline.
E.ON 2.0, the company’s efficiency-enhancement program, has already delivered tangible cost reductions. More than 50 subprojects consisting of numerous individual measures have been initiated or already implemented. E.ON has established a leaner organizational setup in its energy trading business and other areas, eliminated intermediate levels of management in Munich and elsewhere, and set up new entities for procurement and business services. These measures have significantly reduced bureaucracy across the company. E.ON already trimmed its costs by €200 million in 2012 and expects to cut another €600 million this year. “Cutting costs and bureaucracy isn’t an end in itself but rather an indispensable prerequisite for the successful implementation of our strategy,” Teyssen said.
“We can point to important successes and milestones as we transform our company,” Teyssen said, even though these achievements are not yet adequately reflected in E.ON’s stock price. But discussions with investors have shown that this is not a result of doubts about the company’s strategy or a lack of success in implementing it but rather is a consequence of the radical changes in Europe’s traditional power generation and wholesale energy businesses. “From their high point in 2009, wholesale power prices have fallen by 50 percent,” Teyssen said. “In many European markets, even the margins of state-of-the-art gas-fired power plants are close to zero. Conventional power generation—one of our company’s biggest core businesses—is under enormous pressure.”
E.ON had announced that it would restore the profitability of its generation fleet and consider shutting down unprofitable assets. The company was able to avert the impending shutdown of its most technologically advanced gas-fired generating units, which are located at Irsching power station in Bavaria, by reaching an agreement with the Federal Network Agency and the local network operator. Effective immediately, the agreement ensures that E.ON receives acceptable compensation for its fixed costs. Nevertheless, in the current circumstances E.ON believes that a new market design is necessary, one that provides acceptable compensation for maintaining technologically advanced, climate-friendly generating capacity.
Teyssen stated E.ON’s clear support for the transformation of Germany’s energy system but also called for a paradigm shift: “In Germany we’re still too fixated on megawatts.” The country, he said, is installing wind turbine after wind turbine and solar panel after solar panel in the belief that by doing so it has already transformed its energy system. But simply using different technologies to produce energy is not enough. The traditional distinction between generation, transmission, distribution, and consumption is dissolving. New, smart grids are emerging in which energy flows in all directions. The focal point of these grids isn’t the traditional energy utility but rather the customer. Customers can now choose whether they want to buy energy from the grid or make it themselves and perhaps even market it to others. “E.ON is part of this transformation,” Teyssen said. “This process will lead to the creation of a new E.ON that has greater earnings strength and that will create new and lasting value for its shareholders.”
Teyssen also talked to shareholders about the company’s 2012 results and dividend. In 2012 E.ON increased its operating earnings by €1.5 billion, its underlying net income by €1.7 billion, and its operating cash flow by fully €2.2 billion. The key factor was a significant improvement in the company’s wholesale gas business following the renegotiation of supply contracts with gas producers and the retroactive recovery of losses recorded in the gas business in prior years. In addition, 2011 earnings had been adversely affected by non-recurring items relating to Germany’s accelerated phaseout of nuclear energy. Earnings were also positively impacted by additional generating capacity in Russia and the first permanent cost reductions from E.ON’s ongoing efficiency-enhancement program. Negative factors included stoppages in oil and gas production, Germany’s nuclear-fuel tax, and other new taxes in countries such as Sweden, Italy, Spain, and Hungary. In addition, energy demand fell further across Europe, and E.ON’s earnings were also adversely affected by contradictory regulatory requirements and the continued explosive growth of government-subsidized power production. In view of its significantly improved overall results, however, E.ON will pay a dividend of €1.10 per share, which represents an increase from the prior year. All together, E.ON will pay out to shareholders about 50 percent of its underlying net income.
Teyssen confirmed E.ON’s 2013 earnings forecast, which had been revised in January. For the current year E.ON expects to record EBITDA of €9.2 to €9.8 billion and underlying net income of €2.2 to €2.6 billion. A significant portion of the decline—about €1 billion—represents the loss of earnings streams from divested businesses.