E.ON, GDF Suez Pace Losses Among European Utilities

By Nicholas Comfort and Tara Patel

Oct. 10 (Bloomberg) -- E.ON AG and GDF Suez SA paced losses among European utility stocks for a third day as crude futures fell to a one-year low on concern energy demand will slow.

The Dow Jones Europe Stoxx Utilities Index slid as much as 11 percent to 296.36, the steepest one-day decline since the end of 1986. The industry subgroup was down 8.2 percent at 305.54 as of 12:50 p.m. in London. E.ON, Germany's biggest power company, fell as much as 16 percent while GDF Suez, the world's second- biggest utility, lost 16 percent.

``It seems that the utility sector has picked up a habit of always being in the wrong place at the wrong time this year,'' Dresdner Kleinwort analyst Lueder Schumacher wrote in a note. ``When commodity prices were still rising, premature recovery hopes caused defensive earnings to underperform, and now that the argument has switched to recession versus depression, the defensive nature of utility earnings is being questioned.''

Crude oil prices in New York have dropped 45 percent from a record $147.27 a barrel reached on July 11. The lower cost of oil implies cheaper natural gas, used for heating, because of the relationship between the fuels in European supply contracts, Dresdner analysts wrote yesterday.

Hard coal, used to generate more than a fifth of electricity in Germany, fell to its lowest since April, helping trigger a slump in power prices in the continent's largest market. Higher electricity prices had been a boon for utilities in the country, as they could pass on the costs to consumers.

`Tired'

``Investors may be tired of the power price story,'' Credit Suisse Group analysts including Raimundo Fernandez-Cuesta wrote in a report today. ``We do not know when the process of capitulation on utilities will come to an end but we think many stocks are trading close to harsh ``black sky'' fundamentals.''


Credit Suisse cut its recommendation for Scottish & Southern Energy Plc, the U.K.'s second biggest energy supplier, to ``neutral'' from ``outperform'' and lowered its price target for the stock to 1,600 pence a share from 1,775 pence.

Scottish & Southern lost 9.1 percent to 1,098 pence in London. The company may miss earnings forecasts because of extended production halts at some power plants, Credit Suisse analyst Colin Pollock wrote in an investor note today.

Utilities also fell on concern they will suffer from tighter regulation and slower growth in Russia.

Cap Prices

A move by the Belgian government to cap power prices for three years may be included in an Oct. 14 policy statement by Prime Minister Yves Leterme, Le Soir reported yesterday, citing Energy Minister Paul Magnette. The proposal isn't opposed by the European Commission, Magnette told the newspaper.

The minister noted that the system would affect margins at GDF Suez's Electrabel SA unit, Belgium's biggest power company and the owner of the seven atomic generators at two nuclear plants.

``A wind of panic has swept through the utilities sector,'' Natixis Securities analyst Philippe Ourpatian wrote in a research report.

Matthias Heck, an analyst at Oppenheim Research in Frankfurt, said while the policy may take effect in Belgium, he doesn't think Germany will follow suit. The bigger problem for E.ON is that investors are cutting holdings in companies involved in Russia, he said.

E.ON is having ``serious problems'' integrating its Russian unit OAO OGK-4, Handelsblatt reported yesterday. That's spreading fear the company won't make growth targets in the market it promised would contribute to profit, analysts said.

Stake Purchase

The Dusseldorf-based utility has spent 4.6 billion euros buying a 76 percent stake in OGK-4, a power generator in central Russia, the Ural region and western Siberia, since September last year.

That stake would be worth about 2.7 billion euros if the Russian government cancels plans to open the country's power market to price increases, Landesbank Baden-Wuerttemberg analyst Bernhard Jeggle wrote in a note to investors yesterday.

E.ON spokesman Jens Schreiber said the utility expects its Russian unit to post earnings before interest, tax, depreciation and amortization of 1 billion euros in 2011.

RWE dropped as much as 14 percent, while Enel SpA, Italy's biggest utility, sank as much as 12 percent and Spanish power generator Iberdrola SA slumped 15 percent.

To contact the reporter on this story: Nicholas Comfort in Frankfurt at ncomfort1@bloomberg.netTara Patel in Paris at Tpatel2@bloomberg.net