Vattenfall writes down $4.6 billion in ailing energy market

STOCKHOLM/PARIS Tue Jul 23, 2013 6:17am EDT

File photo of of Vattenfall's Chief Executive Oystein Loseth during a news conference in Stockholm July 29, 2010. REUTERS/Scanpix/Files

File photo of of Vattenfall's Chief Executive Oystein Loseth during a news conference in Stockholm July 29, 2010.

Credit: Reuters/Scanpix/Files

STOCKHOLM/PARIS (Reuters) - Vattenfall VATN.UL, one of Europe's biggest energy companies, has written down the value of its business by 30 billion crowns ($4.6 billion), seeing no prospect of a recovery in the region's ailing electricity markets.

The Swedish state-owned group, which has operations across the Nordic region, Germany and the Netherlands, also said on Tuesday that it plans to split into two divisions - a move that could bring in outside investors.

Vattenfall, along with peers such as Germany's E.ON EONG.DE and RWE (RWEG.DE), and Finnish state-controlled utility Fortum (FUM1V.HE), are suffering from a combination of weak economies and pressure from regulators.

Vattenfall, Germany's third-biggest power generator by output, is the first major utility to cite the European energy market's problems as the reason for a substantial asset writedown.

Weakened by huge debts built up during a decade of consolidation sparked by the liberalization of European energy markets in the 1990s, utilities were ill-prepared for the euro zone crisis, which led to falling demand for electricity.

The European Union's energy-efficiency drive has further reduced power consumption as homes become better insulated and heaters and other appliances more efficient.

"Like other European energy producers, Vattenfall is affected by the increasingly gloomy market prospects," Chairman Lars Nordstrom and Chief Executive Oystein Loseth said in a statement.

"The company now makes the assessment that the market will not recover in the foreseeable future."

Loseth predicted in June that European utilities would remain in dire straits until at least 2020.

Vattenfall said it was accelerating cost reductions planned for 2014 to 2.5 billion crowns from 1.5 to billion. It set a new savings target of 2 billion crowns for 2015 and said it was cutting investment over the next five years.

PERFECT STORM

On the supply side, the picture is not much better as European utilities struggle to incorporate renewable energy into their generation mix.

Vattenfall, half of whose electricity generation comes from fossil-based power, is under political pressure to boost its green footprint.

Subsidized wind and solar energy get priority access to the grid, pushing out traditional thermal generation plants fuelled by coal or nuclear energy.

Even highly efficient gas-burning plants are being mothballed, as U.S. shale gas has sparked a flow of cheap coal to Europe, making old coal plants cheaper to run than newly built gas plants.

The largest of Vattenfall's writedowns, made in the second quarter, was 14.5 billion crowns for gas and hard coal-fired power plants in the Netherlands.

Energy consultancy IHS Cera has estimated that 110 gigawatts of gas-fired generation capacity - the equivalent of about 110 nuclear plants - are at risk of closure in Europe.

In a letter to the European Commission in May, the CEOs of eight leading European utilities companies said their sector was the subject of "a perfect storm", which undermines their capacity to attract capital and endangers security of supply.

CONTINENTAL EUROPE UNIT

Vattenfall, the Nordic region's largest electricity supplier with a market share of 17 percent, said on Tuesday it would split into two units - one for the Nordics and the other continental Europe.

The company hinted it may seek to bring in outside external investors at the new continental Europe division in the longer term.

"The new structure will allow the regions to focus on their respective core issues and will open up opportunities for risk-sharing in Vattenfall's continental operations over time," the company said.

The Euro Stoxx European utilities index <.SX6E > has been the worst-performing index among major sectors since the start of the euro zone crisis, falling from a high of 652 points at the start of 2008 to less than 210 points early last year.

It has since recovered slightly to trade at 218 points on Tuesday, still down 66 percent from its 2008 high.

(Editing by Erica Billingham)

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