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Major power and gas company E.ON splitting in two; focusing on renewables, spinning off conventional power generation

Düsseldorf, Germany-base E.ON, one of the world’s largest investor-owned power and gas companies, is adopting a new strategic direction under which is will split itself in two. E.ON itself will focus on renewables, distribution networks, and customer solutions. The existing conventional generation, global energy trading, and exploration and production businesses will be combined in a new, independent company (“New Company”), a majority of which will be spun off to E.ON SE shareholders. In 2015, E.ON will take necessary preparatory steps for the New Company’s public listing.

E.ON SE will have three core businesses: renewables, distribution networks, and customer solutions. About 40,000 employees will be assigned to the distinctly focused company. In its new setup, E.ON will take new approaches to further developing each of its three core businesses. For this purpose E.ON will increase its investments already for the next year by about €0.5 billion (US$0.62 billion) compared to the previously planned 2015 capex of €4.3 billion (US$5.4 billion).

E.ON will place a particular emphasis on expanding its wind business in Europe and in other selected target markets. It will also strengthen its solar business. It will upgrade its energy distribution networks in its European markets and also in Turkey and make them smarter so that customers can take advantage of new products and services in areas such as energy efficiency and distributed generation.

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’s existing broad business model can no longer properly address these new challenges. Therefore, we want to set up our business significantly different. E.ON will tap the growth potential created by the transformation of the energy world. Alongside it we’re going to create a solid, independent company that will safeguard security of supply for the transformation. These two missions are so fundamentally different that two separate, distinctly focused companies offer the best prospects for the future.

—E.ON SE CEO Johannes Teyssen

Conventional energy. Over the past decade, E.ON has established leading positions in conventional power generation in Europe and Russia. In recent years E.ON has systematically optimized its generation fleet and production costs, laying the foundation for sustainable profitability.

A strong natural gas portfolio—which encompasses exploration and production, gas transport pipelines to Europe, long-term gas procurement contracts, and substantial storage capacity in Germany—makes E.ON one of the leading players in the natural gas business. These power and gas activities will continue to have E.ON’s well-established trading unit as their interface with global commodity markets and European trading platforms.

The New Company will have its headquarters in Germany’s Rhine-Ruhr region and will have about 20,000 employees. Teyssen said that the New Company’s clear focus will put it in an excellent position to lead the necessary consolidation of power generation in Europe and to offer attractive services for the system needs of the future.

The clear separation of power and gas production and trading from end-customer businesses will make both even more transparent for regulators, the company said. The new setup will enable E.ON to accelerate the deployment of new technologies and at the same time make a significant contribution to supply security.

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 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. This will enhance E.ON’s financial flexibility for future growth investments.

E.ON’s financial flexibility is further enhanced by the divestment of its entire businesses in Spain and Portugal, which it has agreed to sell to Macquarie, an Australian investment firm, for an enterprise value of €2.5 billion (US$3.1 billion). The new owner will operate and further develop E.ON’s conventional and renewable operations in both countries and be the future partner for its distribution and retail customers there.

Existing provisions for the dismantling and disposal of nuclear and conventional assets will be fully covered in New Company’s balance sheet. Because it will not have any of the Group’s existing capital-market liabilities and thanks to its solid financing, the publicly listed New Company will be financially robust.

E.ON and New Company’s respective business portfolios will differ considerably in terms of growth, risk, innovation tempo, and cash flow profile. Each company will face different strategic challenges and will therefore have different requirements for capital. The new setup will create another attractive stock, the company suggests. The two publicly listed companies will appeal to different investor groups.

  • E.ON SE is positioned as offering its investors attractive earnings with low volatility and clear growth opportunities.

  • New Company’s investors will benefit from the cash flow from its current business portfolio in Europe and Russia and from additional opportunities created by the anticipated restructuring of generation markets in Europe.

E.ON says that the new setup will offer E.ON’s current shareholders additional value potential.

New setup to be implemented by 2016. The New Company’s business units do not yet constitute a corporation. In 2014 and 2015 E.ON will therefore take the necessary legal steps to combine these units. To ensure reporting continuity, E.ON’s current reporting units will, for the time being, remain unchanged.

The implementation of the new setup will be accompanied by certain costs and taxes, the details of which cannot be clarified until preparatory work is conducted in the coming year. E.ON does not anticipate a lasting increase to its cost base, since new costs will be offset by the reduced requirements of the two companies’ simpler organizational setup.

E.ON expects to carry out the spinoff after approval by the E.ON Shareholders Meeting in 2016.

Comments

Account Deleted

This is just the first power company to do so. Others will follow this track. In the EU power companies are looking to get out of fossils and nuclear and into solar and wind power. For the first 6 month of 2014 Denmark made 40% of all its electric power from wind turbines. And the plan is to keep increasing that share in the coming years eventually to 100%.

Backup power for solar and wind can be delivered with existing gas and coal powered plants as Denmark currently does. However, coal power plants that are operated as backup power facilities are difficult to operate profitable. It is impossible for new coal power plants to be operated that way because of their low capacity factor below 30%. Old coal power plants with no debt remaining still make economic sense. However, eventually fossil based backup power must also be phased out. One promising method that emerges as a fully scalable solution for long-term (even seasonal) renewable energy storage is to use heat sinks. Siemens wind power is now in the early stages of developing a new idea based on storing heat up to 600 degrees Celsius in large reservoirs of sand or stone that is buried underground and insulated to prevent heat losses. Just one facility 3 to 4 square kilometers large and 10 meters deep can store enough heat to power steam turbines that could make all the electricity that Denmark typically consumes in 10 days. That would solve the intermittency problem completely for a country like Denmark that strive to go 100% fossil free using wind power. Heat is transferred into the heat sink using heat pumps (compressors) compressing ambient air at 1 bar and 20 degrees Celsius to 30 bars and 600 Celsius and blown through standard steel tubes within the heat sink. After delivering some of the heat to the heat sink the air is decompressed through a gas turbine that helps turn the compressor. That process also produces freezing cold air at minus 100 degrees as the exhaust of the gas turbine to be used for cooling (say industrial food storage).

Siemens early estimates is that they can make electricity at about 12 cents per kwh using such a facility which is lower than all the alternative methods including compressed air, hydrogen or pumped hydro storage. These alternative methods also require suited geographic locations like a depleted gas field for storing compressed air or hydrogen or a steep mountain for hydro storage. The heat sinks can be build anywhere and at any size. Potentially even a house owner with solar panels on the roof and heat sinks buried in the garden could do this but the cost would go up in such a small scale facility. Mass production could of cause bring it down for such micro facilities.

Danish source for Siemens project
http://ing.dk/artikel/siemens-vil-lagre-stroem-i-kaempe-sandbunker-172557

DavidJ

Good to see your positive view Henrik as I'm more cynical. The paranoia in the UK is that the energy utility market is not competitive. One tactic used is that the customer facing company points to low profits to justify reasonable competition. However the associated upstream companies make fat profits. This restructuring facilitates such a fiddle.

Darius

It has been trend for a while major utilities spining off base load power generation an focusing on power distribution when taking green generation as image building facility. In the end power generation prices are going up and economy laging but who cares about that...

Account Deleted

Darius electricity does not represent a large economic burden in any modern economies. In the EU we consume about 5000 kwh per year per person so at 0.08 USD per kwh we are talking about 400 USD per year per person. Making a transition to go 100% wind and solar power may increase the cost a little say to 0.12 USD per kwh mainly because of the cost of the required non-fossil based backup systems like heat sinks or hydrogen. However, we gain more economically from eliminating the pollution associated with the fossil fuels. That pollution causes widespread diseases that makes us less happy and less productive.

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