Germany's E.ON SE said on Sunday, Nov. 30, it will spin off its conventional power generation, energy trading and exploration operations into a new company and expects to book a €4.5 billion ($4.6 billion) writedown as it turns its attention to renewable energy.
The move is the most radical step yet in a long-running restructuring of E.ON, which had until this week focused on offloading assets to pay down about €31 billion of debt. E.ON also on Sunday said it had sold its Spanish and Portuguese assets to Australia's Macquarie Group for €2.5 billion, and confirmed plans to sell its Italian operations and review options for its North Sea exploration and production business.
"We are convinced that it's necessary to respond to dramatically altered global energy markets, technical innovation, and more diverse customer expectations with a bold new beginning," E.ON CEO Johannes Teyssen said in a statement. "E.ON's existing broad business model can no longer properly address these new challenges."
Germany's power sector has been roiled by a state-backed surge in renewable energy production, which has forced prices lower and undermined the profitability of traditional coal and gas-fired power stations.
For E.ON, sluggish economic growth in Southern Europe has hurt demand in markets that it had hoped would drive earnings growth. E.ON in 2008 paid €11.5 billion to buy power stations in Italy and Spain from Enel SpA and Endesa SpA just as the global financial crisis hit and both nations' economies began to contract.
E.ON said on Sunday that the non-cash €4.5 billion charge it plans to book is largely related to a collapse in the value of its Southern European assets. That charge is in addition to €700 million of writedowns already announced over the first three quarters of this year.
E.ON will focus on renewables, distribution networks and customer solutions, and claimed that the three operations are a natural fit and had greater growth prospects. The Dusseldorf-based utility said it will invest in wind power expansion in Europe and other selected markets and will also strengthen its solar operations.
"This is an extremely brave but progressive move by E.ON," RBC Capital Markets' London-based analyst John Musk noted. "The question now becomes [will] other integrated utilities will follow suit."
E.ON said the process of preparing the remaining operations for a listing will begin in 2015 and conclude in 2016 following a shareholder vote. E.ON's debt will remain with the existing business, meaning that the new company will be spun off with "no financial liabilities," Teyssen told a press conference on Monday.
Non-renewable energy accounted for more than 80%, or 51 gigawatts, of E.ON's power generation capacity at the end of last year. That included about 25 gigawatts of generating capacity from natural gas fired power stations, 12 gigawatts of coal-fired capacity, and about 4.6 gigawatts of oil and lignite power stations.
E.ON owns production and exploration assets in the Norwegian and U.K. North Sea, Algeria and Russia. It produces about 17 million barrels of oil equivalent each year from the North Sea, where it has about 186 million barrels of oil equivalent of reserves, and will produce 6.3 billion cubic meters of gas in Russia, where it has 152 billion cubic meters of reserves, according to a management presentation on Monday.
E.ON CEO Teyssen said that he didn't intend to set the new company up to be taken out by a competitor but admitted that there could be interest. "If others speculate about such a takeover then it suggests that this company is attractive," Teyssen told reporters. "The board is not pursuing a sale."
The slimmed-down E.ON will have 4.4 gigawatts of renewable production capacity and is building or has approval to build a further 15 gigawatts of capacity. Its electricity grid operation includes 411,000 kilometers of wires in Germany and 200,000 km in Turkey as well as 450,000 km elsewhere in Europe. The unit has about 26 million grid customers and 33 million customers in total.
E.ON's generation, upstream and trading unit accounted for about €3.3 billion, or 35%, of its €9.23 billion of Ebitda in 2013. The company's renewable and grid network contributed about 55% of its Ebitda.
"The first step of the spinoff will involve E.ON transferring a majority of New Company's capital stock to its shareholders, with the result that New Company will be deconsolidated," E.ON said. "E.ON intends — over the medium term and in a way that puts minimum pressure on the stock price — to sell the shares of its remaining minority."
E.ON shares traded Monday at €14.81, up €0.59, or 4% , on its Friday close, equating to an equity valuation of €29.7 billion. The company's market capitalization has slipped 35% over the past five years.