E.ON Profit Climbs 6% on Acquisitions, Higher Prices

By Nicholas Comfort

Nov. 12 (Bloomberg) -- E.ON AG, Germany's largest power company, increased nine-month profit 6 percent as acquisitions drove sales and higher electricity prices boosted earnings among European utilities.

Adjusted net income, which doesn't include one-time items, climbed to 4.46 billion euros ($5.59 billion) from 4.21 billion euros a year earlier, the Dusseldorf-based company said today in a statement. Net income dropped to 100 million euros in the third quarter from 1.35 billion euros a year earlier on derivatives losses and lower book gains, E.ON said.

Utilities including Italy's Enel SpA and Germany's RWE AG have reported higher third-quarter earnings on a surge in European power prices, which rose to records in the period as fuel and emission costs gained. E.ON also benefited from purchases in Italy, Russia and Spain, where it acquired more than 10 billion euros in assets from Endesa SA.

``Spain is one of the segments which will carry the growth dynamic forward,'' said Bernhard Jeggle, an analyst at Landesbank Baden-Wuerttemberg. ``The gain in power prices is a central story too, and that should remain intact.''

German electricity for next-day delivery sold for an average of 77.28 euros a megawatt-hour in the third quarter, more than double its year-earlier value, according to broker GFI Group Inc. The country accounts for 54 percent of E.ON's revenue, according to data compiled by Bloomberg.

Shares Slip

E.ON fell as much as 3.3 percent to 28.60 euros in Frankfurt trading, and was at 29.01 euros as of 2:19 p.m. local time.

Sales jumped 39 percent in the third quarter to 19.3 billion euros. The utility reiterated that it expects full-year adjusted net income and adjusted earnings before interest and tax to rise by between 5 and 10 percent.

Quarterly net income was hurt by losses on derivatives, which utilities use to hedge against fluctuations in the cost of commodities such as coal and natural gas.

``Net income only fell because of items like the lower book gains and marking to market of derivatives,'' said Peter Wirtz, an analyst at WestLB AG in Dusseldorf, who recommends investors add the shares. ``Adjusted net income, which is a better indicator, rose on the Endesa assets and power prices,'' he said before the results were released.

Spanish Purchases

Madrid-based Endesa sold power plants to E.ON to satisfy competition regulators after it was taken over by Enel and Spain's Acciona SA last year. E.ON's acquisitions in Spain, where power consumption is expected to outpace the European Union average, helped the company raise generating capacity by about 20 percent at the end of the second quarter.

Soaring electricity prices in European countries including Germany, Italy and the U.K. have been a boon for utilities that own power plants. Electricite de France SA, which has generators in each of those markets, said today that third-quarter sales gained 8.3 percent on higher tariffs.

RWE, the No. 2 power producer in Germany, increased third- quarter profit fivefold after restarting a nuclear reactor. Enel, Italy's largest utility, boosted quarterly earnings threefold after adding plants and customers with the Endesa purchase.

Meanwhile, Scottish & Southern Energy Plc, a U.K. energy supplier that has plants off line for repairs and upgrades, said profit tumbled as it was forced to purchase wholesale power at record prices.

Buyback Suspension

E.ON will suspend its share buyback program because of tighter credit markets, Chief Financial Officer Marcus Schenck said on a conference call with reporters today. The company has repurchased 6.5 billion euros of the 7 billion euros it planned to buy back, and will ``keep its promise'' once tension on financial markets eases, he added.

Declines in valuations and higher volatility also led to writedowns of 294 million euros in the third quarter and may cause further losses, the company said. The utility is ``stepping up'' its risk management because counterparties, notably financial institutions, may default on payments.

While E.ON is witnessing a widening of credit spreads, it still has ``good access'' to capital markets and expects to receive the necessary 30 billion euros in financing through 2010. The utility has raised almost 17 billion euros in bonds and had issued about 5 billion euros in commercial paper by the end of September, according to today's statement.

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