E.ON Leads Declining Utilities as Worst Performers on Stoxx 600

By Nicholas Comfort and Paul Dobson

Oct. 9 (Bloomberg) -- E.ON AG, Germany's largest utility, led declines among European rivals on concern the Russian market may hamper growth and as Belgium proposed power price regulation.

Dusseldorf-based E.ON, the largest weighted in the Dow Jones Europe STOXX Utilities Index, fell as much as 2.75 euros, or 8.7 percent, to 28.90 euros in Frankfurt trading. It was down at 29.26 euros as of 12:32 p.m. local time. GDF Suez SA, which is Belgium's biggest power supplier and holds second place in the index, tumbled as much as 7 percent in Paris.

E.ON is having ``serious'' problems integrating its Russian unit, OAO OGK-4, and is replacing several management figures, Handelsblatt reported today, citing unidentified people familiar with the matter. Belgian Energy Minister Paul Magnette has suggested a plan that would fix maximum power prices based on production costs and profit margins, curbing earnings at GDF's unit in the country, Le Soir reported, citing an interview.

``Those people who were surprised by difficulties in Russia are pulling their rip cords,'' said Thomas Deser, who helps manages about 600 million euros, including shares of E.ON and GDF at Union Investment GmbH in Frankfurt. ``News from Belgium suggests governments may try to bolster their budgets with windfall taxes on sectors like utilities that are still doing alright.''

Russian Asset

UniCredit cut E.ON's price target to 41 euros from 44 euros, reflecting adjustments in the value of its stakes in OAO Gazprom and OAO OGK-4, analyst Karin Brinkmann said today in a note to investors. The utility swapped part of its holding in Gazprom last week, while OGK-4's share price has fallen 65 percent since E.ON bought its first stake in the power generator in September last year.

E.ON won't write down the value of its 76 percent interest in OGK-4, even though it paid a 1.75 billion-euro premium for the company, Handelsblatt reported earlier, citing Lutz Feldmann, the board member responsible for Russia. The company still forecasts earnings before interest, tax, depreciation and amortization at the unit of 1 billion euros in 2011, he told the newspaper.

UniCredit doesn't anticipate E.ON will need to write down the value of its stake and kept a ``hold'' recommendation on the utility's stock, Brinkmann said.

In a separate report, Dresdner Kleinwort said U.K. natural- gas prices will follow oil prices lower, cutting profits for coal-fed power plant operators including Drax Group Plc and ending the need for retail price increases by Centrica Plc.

U.K. Prices

``U.K. gas and power prices are trading at a 30 percent premium to levels justified by global commodity prices,'' London-based Dresdner analyst Martin Brough said in a note yesterday. He lowered his recommendation for Scottish & Southern Energy Plc and Drax to ``sell'' from ``hold,'' and advised buying shares of Centrica, the U.K.'s biggest energy supplier.

International Power Plc, the U.K. utility that generates electricity in 20 countries, was cut to ``reduce'' from ``buy,'' because ``the global slowdown will have an impact on perceived earnings and the company's cost of equity,'' according to the note. ``Despite expecting earnings growth we believe that the low rating on the shares will worsen before it improves,'' Brough wrote.

Dresdner raised National Grid Plc to ``buy'' from ``add'' because the owner of gas and power networks in Britain and the U.S. is ``well-placed'' to deliver on its dividend estimate of 8 percent nominal growth a year through its 2012 fiscal year.

Scottish & Southern fell 3.9 percent to 1,245 pence as of 11:46 a.m. in London, the lowest in more than two years. International Power declined 3.1 percent. Centrica fell 0.6 percent to 288 pence and Drax fell 2.5 percent to 667 pence. National Grid fell 5.6 percent to 627.5 pence.

To contact the reporters on this story: Nicholas Comfort in Frankfurt at ncomfort1@bloomberg.net