WRAPUP 2-E.ON, GDF Suez earnings hit by European energy crisis

Wed Nov 13, 2013 12:22pm EST

* E.ON trims outlook, GDF warns of European asset writedowns

* Both forced to close or mothball modern gas-fired plants

* Both firms bank on emerging markets, GDF also on energy services

* Valuations depressed, both stocks trade around 0.76 times book

By Geert De Clercq and Christoph Steitz

PARIS/FRANKFURT, Nov 13 (Reuters) - Germany's E.ON and French GDF Suez, two leading European utilities, posted lower earnings as a prolonged energy crisis in Europe is leading to power plant closures and asset writedowns.

Both companies said they would focus on investment in emerging markets to try and counter a stagnant western Europe, where economies are struggling to emerge from recession.

E.ON said its European electricity production fell 7 percent in the first nine months of the year and saw core profit fall by a fifth. The group trimmed its 2013 core earnings forecast to a range of 9.2 to 9.3 billion euros ($12.4-12.5 billion), from 9.2 to 9.8 billion.

GDF, Europe's second-largest by market value after French EDF, posted a 6.5 percent drop in nine-month core earnings and said it would write down European power assets but confirmed guidance for current earnings.

Falling demand and overcapacity have led to plunging wholesale power prices and have thrown Europe's utilities into an unprecedented crisis.

To make matters worse, abundant U.S. shale gas has led to Europe-bound exports of cheap U.S. coal, which makes gas-fired generators uneconomical and forces utilities to close down or mothball dozens of turbines.

E.ON has shut seven gigawatt (GW) of gas plant capacity - equivalent to seven nuclear plants - while GDF has closed down 12 GW, decided to close 2 GW in the third quarter and has put another 5 to 7 GW under review.

Ingo Becker, European head of utility research at Kepler Cheuvreux, sees little improvement in market conditions.

"There is no real end in sight," he said.

Utilities also struggle with renewables, which have zero fuel costs and enjoy priority access to the power grid, pushing thermal generation out of the market.

"It simply isn't acceptable that renewables receive guaranteed, risk-free compensation but that conventional capacity - essential for ensuring a reliable power supply - is barely able to cover its costs," E.ON CEO Johannes Teyssen said.

The crisis has also hit rivals, most notably Germany's RWE and EnBW, due to the additional burden of Germany's decision to abandon nuclear power by 2022.

FLIGHT ABROAD

To compensate for low-growth Europe, GDF and E.ON both bank on emerging markets where power demand growth is high and their traditional business model of centralised power production in capital-intensive plants is not challenged by wind and solar.

GDF CEO Gerard Mestrallet said that in past months GDF had sold power plants in Portugal and Australia and entered new markets including Mongolia, Vietnam, Uruguay and South Africa.

"These transactions fit into GDF's strategy to reduce footprint in mature markets in order to recycle capital and reinvest in fast-growing markets," he said.

In January-September, GDF earned 10.5 billion euros in Latin America, Asia and the Middle East, or 15.5 percent of its 67.6 billion euros consolidated revenue.

"GDF Suez has been well ahead of the pack in taking the emerging markets route and among European integrated utilities it is now the uncontested leader in terms of exposure to these markets," said KBC Securities analyst Dieter Furniere.

E.ON, which for years has run a utility business in Russia, has only recently begun expanding in other growth markets like Turkey, where it owns 50 percent in energy group Enerjisa in a venture with Sabanci, and Brazil, where it bought a 38 percent stake in power firm Eneva last year.

Non-EU markets accounted for just 6 percent of E.ON's nine-month core earnings, unchanged from last year.

E.ON has said it aims to generate more than 25 percent of net income in markets outside Europe in the second half of the decade, roughly double current levels.

Besides investing in growth markets, GDF also bets on energy services, in which it has become the top European player, followed from afar by RWE and Sweden's Vattenfall.

GDF's energy services unit employs nearly 80,000 staff, over half its total staff count, and is expanding abroad through acquisitions, most recently with a 190 million pound buy of the facilities management unit of Britain's Balfour Beatty.

With the bulk of their activities still in Europe, the two firms' diversification so far has not helped valuations. E.ON and GDF both trade around 0.76 times book value, the lowest in the Dow Jones Stoxx European utilities index.

In the year to date, E.ON shares are down 4.2 percent, GDF shares are up 19 percent.

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