* E.ON set to predict lower earnings, cut dividend
* Set to introduce more cost cuts, disposals
* Investors expect outlook to be worse than analysts predict
* E.ON expectations apply to whole sector
* Bleak outlook to dampen sentiment towards industry
By Peter Dinkloh
FRANKFURT, Nov 8 (Reuters) - Germany's E.ON (EONGn.DE), Europe's largest utility, will on Wednesday likely confront investors with bleak earnings forecasts for the next few years, further hitting perceptions of the sector as a whole.
E.ON is the first large European utility that is reconsidering its whole strategy since the economic crisis made the industry the worst-performing sector for two years in a row as demand and energy prices plummeted.
RWE (RWEG.DE), Europe's fifth-largest utility, already signalled the difficulties the industry is facing when it said in August that it would have to "update" in February its prediction that earnings in 2013 would be higher than in 2009.
"All the large utilities will be influenced by what is going on at E.ON," said Richard Budgett, who helps manage more than 1 trillion euros (867 billion pounds) for Allianz Global Investors in London. "I would say there's a greater than 50 percent probability" that E.ON comes out with predictions that are worse than investors currently assume.
"There is no growth (for E.ON), the utility sector is now getting into its own crisis."
Industrial production -- a key measure for energy demand -- is at the levels of early 2004 and the International Monetary Fund, one of the organisations overseeing the global financial system, sees economic growth in Europe at 2.3 percent this year and 2.2 percent next year.
At that rate it would take at least until the middle of the decade for energy consumption to return to pre-crisis levels, even as more windmills and other renewable energy sources, often operated by competitors to large utilities, come online and wrestle away market share. ^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^ For a graph of industrial production and utility earnings click on: r.reuters.com/xuw34q ^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^
Nonetheless analysts expect E.ON's operating profit to rise 3 percent in 2012, according to Thomson Reuters StarMine, after a 13 percent drop due to the billion-euro burden of Germany taxing the fuel of nuclear power plants in 2011.
StarMine gives more weight to more recent estimates and to estimates from analysts with a history of correct predictions.
But markets might be too optimistic after seeing seven years of rising operating earnings at the company, which was created 10 years ago from a merger of two industrial conglomerates.
In addition to the burden of the nuclear fuel, gas traders see the gas market oversupplied for coming years.
As utilities sell most of their power before it is produced, the full effect of power prices dropping close to six-year lows also still has to hit the company.
"The tide E.ON is currently facing looks too strong," said UniCredit analyst Lueder Schumacher. "E.ON depends on a recovery of power and gas prices."
German magazine Der Spiegel reported, citing internal E.ON documents, that pretax earnings are slated to drop 30 percent over the coming three years. A spokesman for E.ON declined to comment on the report. [ID:nLDE6A507S]
While analysts are expecting a decline in profit at E.ON and RWE next year, they are not seeing a drop at its three closest rivals Enel (ENEI.MI), GDF Suez GSZ.PA and EDF (EDF.PA), according to StarMine.
Not just E.ON but "all utilities will have to find an answer as to how to get through that valley of tears," said Equinet analyst Michael Schaefer.
The utility's new chief executive, Johannes Teyssen, at the helm since May, will reveal a strategy that only few European peers -- one of them German conglomerate Evonik [EVON.UL] -- have pursued so far: going into Asia.
"Teyssen can either say I make the company more efficient or he seeks to expand in to new markets," said Kepler Equities analyst Ingo Becker. "He might try to do both."
The 51-year old executive told German paper Sueddeutsche Zeitung that he found fast-growing Asian energy markets such as China interesting and Der Spiegel reported that he would indeed target them as part of his new strategy.
Shedding assets that either require a lot of investment or are less profitable than others has been part of E.ON's strategy since at least the beginning of 2009 and is set to continue.
The Sunday Times reported that E.ON was in advanced talks to sell its British power grids to a group of infrastructure funds and Der Spiegel said it was considering selling assets to hold the slide in profits. [ID:nLDE6A60AK]
For a change, not all measures are meant to drive up the share price: "A single-A rating is a priority a lot of the large utility groups are focusing on," Allianz's Budgett said. "They are not in any way in a growth mode now: They are focusing on the bondholders, not the equity holder."
Maintaining that rating ensures that utilities, which typically take on more debt than other sectors, have access to credit even if loan markets are hit by another crisis, Budgett said.
E.ON is currently valued two notches above a "B" rating by rating agencies Standard & Poor's and Moody's. (Editing by Sitaraman Shankar)