LONDON/PRAGUE Three of Europe's largest utilities, buoyed by government support, expect renewable energy sources plus ongoing cost cuts to help them weather higher wholesale gas purchasing prices and support earnings for the current financial year.
The world's number one utility by sales, Germany's E.ON reported Wednesday it produced 7 percent more green power than a year ago while central Europe's biggest listed company, the Czech Republic's CEZ, added its renewable power production remained stable.
One of Britain's six big energy suppliers, Scottish & Southern Energy (SSE), produced 55 percent more renewable energy in the first half of its financial year.
European governments are enticing companies with subsidy systems to expand the use of solar, water and wind power to cut greenhouse gas emissions and assuage public opposition to coal-fired power plants.
Deutsche Bank analyst Hasim Sengl saw "positive developments in the renewable energy segment, especially wind energy" of Germany's E.ON (EONGn.DE).
Deutsche Bank analyst Martin Brough, referring to SSE, added: "We continue to expect earnings growth to pick up in the coming years as wind farms under construction come on-line and as upstream profits benefit from rising wholesale prices."
"The contribution from these (renewable energy) assets is significant," RBC Capital Markets analyst John Musk said in comments before SSE released results.
Earnings from windfarms and solar parks are largely exempted from wholesale power markets and therefore more stable than profits from coal-fired power plants which are hit by declining power prices as weak economic growth dampens demand.
E.ON reiterated it sees full-year earnings before interest, taxes and depreciation (EBITDA) adjusted for extraordinary effects such as asset sales of as much as 9.8 billion euros (13.5 billion).
CEZ CEZPsp.PR reiterated it expects 2011 EBITDA to drop 5 percent to 84.8 billion crowns ($4.6 billion), while SSE expects a "modest" increase in profits before tax.
European utilities have to make up for wrong bets on natural gas prices, as they committed themselves to long-term contracts with Russia's Gazprom (GAZP.MM) in which prices are tied to the oil price.
But the gas market is swamped with liquefied natural gas as customers in countries such as the United States buy gas from newly found shale gas reserves on their own soil.
With the oil price tripling in three years and gas prices for gas freely traded in markets such as Zeebrugge rising some 10 percent in the period, earnings from long-term contracts are dropping as customers turn to cheaper sources for gas.
Parts of the European power market are undergoing a drastic change: The German government is phasing out nuclear power in Europe's largest economy, depriving the country's utilities of their most profitable large-scale power plants, while levying a tax on the reactors' fuel for their remaining lifespan.
E.ON therefore had to lower its profit expectations for the year in August, cut its dividend and seeks to retain profitability by cutting as much as 14 percent of its jobs.
It still aims to cut annual controllable costs to 9.5 billion euros from 11 billion euros, it said Wednesday.
Plans to escape tricky European market conditions and tap into faster-growing emerging markets such as Brazil, Turkey or India are still at an early stage.
E.ON recently bid for a stake of around 20 percent in Portuguese power provider EDP (EDP.LS), which has operations in Brazil.
(Writing by Peter Dinkloh; Editing by Hans-Juergen Peters and Mike Nesbit)