E.ON, Germany’s largest utility, has announced plans to spin off its thermal power generation assets, in an attempt to adapt to the changing dynamics of the countrys electricity landscape. The restructure will see its fossil fuel generating assets spun off into a new public company in 2016, with the remaining company focusing on renewable energy, distribution and direct services to household and commercial consumers.
Germany’s Energiewende, its transition away from fossil fuel and nuclear electricity generation towards renewable energy, has caused a shift in electric utility business models. In the most dramatic manifestation of this trend to date, E.ON will book a 4.5 billion (US$5.6 billion) impairment charge on its southern European and traditional generation assets and spin off these generation assets into a separate company.
The business units not spun off will retain the E.ON brand name.
"The new customer-oriented energy world is fundamentally different from system-oriented energy world," said E.ON CEO Johannes Teyssen upon announcing the changes. "By separating the thermal generation assets from a ‘new E.ON’, it will allow the business units to be ‘best in class’ in their respective fields," the CEO added. Wind and solar PV generation will fall within the "new E.ON" company brand.
Bloomberg reports that on the announcement of the new strategy its shares jumped by over 6%.
"We firmly believe that creating two independent companies each with a distinct profile and mission is the best way to secure our employees’ jobs," said Teysson.
E.ON’s profits have been declining as Germany’s electric utility market has shifted. Bloomberg reports that its profits are down 25% for the first nine months of 2014. The "new E.ON", of which solar will remain a part, will continue to employ 40,000 people. In 2013 this segment of the business delivered profits of 5 billion ($6.2 billion) on an EBITDA basis.
The spun-off company will be composed of conventional generation, hydropower and gas storage assets, and will employ approximately 20,000 people. In 2013, this second business unit contributed 4 billion ($4.98 billion) in profits. In 2014 E.ON still expects to record a profit between 8 (9.97 billion) and 8.6 ($10.7 billion) billion.
Bloomberg reports that, in spinning off its legacy generation assets, E.ON "could set a blue print for other utilities", in comments made by analysts Sanford C. Bernstein & Co. "It will create more strategic clarity for E.ONs shareholders and will help unlock more value for the stable downstream businesses," the analysts report.
E.ON is also seeking to dispose of assets in Italy and has placed its fossil fuel activities in the North Sea under strategic review, revealed Bloomberg.
E.ON will remain a minority shareholder in the spun off company, which then could also be sold.