E.ON to adjust setup for greater customer proximity

Interim Report III/2016

11/09/16

  • Nine-month adjusted EBIT in core business up 13 percent to over €1.9 billion
  • Adjusted Group EBIT of €2.3 billion slightly below prior-year figure
  • Full-year 2016 forecast affirmed: adjusted EBIT expected to be between €2.7 and €3.1 billion, adjusted net income between €0.6 and €1 billion
  • Transfer of Uniper to shareholders leaves mark on E.ON’s balance sheet but creates more options and clears E.ON’s path to the new energy world
  • Net loss of €9.3 billion is exclusively attributable to discontinued operations and is not cash-effective
  • E.ON’s equity reduced in wake of spin-off, but not its ability to pay out dividends
  • Solution for financing nuclear phaseout in Germany on horizon
  • Efficiency program launched to sharpen customer orientation

To be successful, we need to be closer to our customers. We’re going to become leaner and more agile, which will enable us to successfully position ourselves, even in the face of keener competition. We’re going to give more decision-making authority to those employees who work closely with our customers.

Johannes Teyssen, E.ON CEO

We put customers at the center of everything we do. Adjusting also our organizational setup to reflect this will further increase E.ON’s competitiveness. This and strict investment management are essential for our company’s successful development.

Michael Sen, E.ON CFO

Overview

E.ON concluded the first three quarters of the year with improved operating results in its core business.

At approximately €1.9 billion, adjusted EBIT in E.ON’s core businesses (Energy Networks, Customer Solutions, and Renewables) was about 13 percent above the prior-year figure of €1.7 billion.

Adjusted Group EBIT, which includes non-core business and divested operations, declined by 4 percent year on year, from €2.4 billion to €2.3 billion. If the roughly €250 million in prior-year earnings attributable to companies divested in the past year are factored out, E.ON’s adjusted Group EBIT is about €120 million above the prior-year figure.

Adjusted net income declined by €58 million to €641 million.

E.ON affirms its forecast for full-year 2016. The company expects Group adjusted EBIT of €2.7 to €3.1 billion and adjusted net income of €0.6 to €1 billion.

Nine-month economic net debt of €23.6 billion was higher than the pro forma figure of €21.3 billion for year-end 2015 that E.ON released in April. The increase in the current year is predominantly attributable to the artificially low interest-rate environment and the marking to market of E.ON’s pensions under IFRS. But because these two factors do not result in increased expenditures, E.ON will not take any countermeasures.

E.ON’s net financial position improved by about €500 million relative to year-end 2015.

Operating cash flow before interest and taxes increased by 12 percent year on year to €3.8 billion, mainly because of an improved cash-conversion rate.

Segment performance

Energy Networks’ adjusted EBIT declined by €63 million to €1.2 billion owing to the absence of positive one-off items recorded in the prior year at its business in Germany.

Customer Solutions’ adjusted EBIT increased by €61 million to €548 million, in part because of lower costs in conjunction with government-mandated energy-efficiency measures along with improved margins in Hungary, the Czech Republic, and Sweden.

Renewables’ adjusted EBIT rose by €85 million to €309 million, mainly because Amrumbank West and Humber Gateway wind farms were fully operational for the entire period in the current year and because of book gains.

Adjusted EBIT at Non-Core Business declined by €103 million to €283 million, mainly because of the decommissioning of Grafenrheinfeld nuclear power station and declining market prices. Lower expenditures for the nuclear-fuel tax in 2016 had a positive impact on adjusted EBIT.

Income/loss from discontinued operations leads to net loss of €9.3 billion

Uniper’s stock price has risen by more than 20 percent since the successful spin-off. This is because the market sees signs of recovery in the conventional energy world. E.ON shareholders who have held on to the Uniper stock issued to them at no cost have directly benefited from this performance.

However, E.ON had to adjust Uniper’s book value to reflect its market capitalization , resulting in impairment charges of €6.1 billion and a net loss of €9.3 billion. The net loss was entirely attributable to E.ON’s discontinued operations and is not cash-effective.

Equity reduced

The successful spin-off, the subsequent impairment charges, and higher pension obligations due to the low interest-rate environment significantly reduced E.ON’s equity pursuant to IFRS to about €433 million at the end of the third quarter. In 2015 Uniper accounted for €15.5 billion of E.ON’s total equity of €16.4 billion. An agreement on financing the phaseout of nuclear energy in Germany will have an additional adverse impact on E.ON’s equity. The nuclear-liability premium and further balance-sheet adjustments (such as the revaluation of E.ON’s remaining provisions for dismantling its nuclear power stations) will further reduce E.ON’s equity such that it will likely become negative in the fourth quarter. However, this only applies to E.ON’s equity pursuant to IFRS. By contrast, E.ON’s equity pursuant to German GAAP—which is the relevant figure for dividend payments—is well into the positive range. E.ON’s ability to pay out dividends is therefore undiminished.

Consensus solution for nuclear phaseout in Germany on the horizon

The German federal government decided to adopt the proposals of the Commission for Organizing and Financing the Nuclear Energy Phaseout. E.ON is prepared to pay a considerable amount—which will be in the range of the roughly €10 billion already communicated—to support this solution. In return, the German state will assume responsibility for the intermediate and final storage of the country’s nuclear waste. E.ON advocates that the law be underpinned by a contractual agreement in order to ensure lasting legal certainty. “E.ON has sufficient financing flexibility to make available the necessary funds,” Michael Sen said. “There’s therefore no need for us to take action in the immediate future. We’re currently analyzing alternatives to a rights issue to finance the premium. We’re aiming to avoid a rights issue.”

Improve customer orientation through a more efficient organization

The spin-off was a demanding process and could only be accomplished on the basis of E.ON’s existing organizational setup. As previously announced, E.ON will now not waste any time in extending its transformation to its organizational setup and processes. The objective is to systematically sharpen the new E.ON’s focus on its customers’ needs and desires. “To be successful we need to be closer to our customers,” Johannes Teyssen said. “We’re going to become leaner and more agile, which will enable us to successfully position ourselves, even in the face keener competition. We’re going to give more decision-making authority to those employees who work closely with our customers.”

E.ON intends to eliminate inefficiencies resulting from the Uniper spin-off. It will also address systematically a number of adverse developments since its Capital Market Day in April: the British pound’s weakness following the Brexit vote, interventionist remedies proposed by Britain’s Competition and Markets Authority, and the foreseeable reduction of network returns in Germany.

CEO Johannes Teyssen: “Our objective is to ensure that the company, despite facing further fundamental change, has a lasting future. We’re certain that the combined effort of our entire company—particularly our dedicated employees—will enable us to succeed.”

Review of investment budget

The current low interest-rate environment and increasingly fierce competition are putting pressure on returns in E.ON’s core markets. E.ON will therefore review its current investment budget.

CFO Micheal Sen: “Our owners are justified in expecting us to be extremely disciplined with regard to investments and to improve our organizational setup. We’re now going to set about doing both systematically.”

Over the long term, E.ON sees good opportunities for all of its core businesses. The transformation years will enable the company to lay the foundation for consolidating its balance sheet and for achieving consistently profitable growth.

This press release may contain forward-looking statements based on current assumptions and forecasts made by E.ON Group Management and other information currently available to E.ON. Various known and unknown risks, uncertainties, and other factors could lead to material differences between the actual future results, financial situation, development, or performance of the company and the estimates given here. E.ON SE does not intend, and does not assume any liability whatsoever, to update these forward-looking statements or to conform them to future events or developments.