Eon to spin off its fossil fuel assets as big losses loom

Germany's biggest utility Eon said it would spin off its fossil fuel and nuclear generation business into a new company and focus on renewables in a radical shift of business strategy, as it announced additional impairment charges of €4.5bn for this year.

The company's earnings have been squeezed by Germany's transition to renewable energy, under which electricity from clean sources is subsidised by bill payers and given favourable access to the grid.

Eon's existing business model could no longer address dramatically altered global energy markets, chief executive Johannes Teyssen said. A new company combining Eon's conventional generation, global energy trading and exploration and production businesses will be publicly listed. He said in a statement that the spin-off is a "bold new beginning". 

Eon, Germany's biggest utility by market capitalisation, posted a 25 per cent drop in profit for the first nine months of this year, compared with the same period in 2013. 

Eon said it expected additional impairment charges of about €4.5bn in 2014, primarily on its operations in southern Europe and on generation assets, beyond €700m already disclosed in the first three quarters. The impairment charges will result in Eon reporting a substantial loss.

Eon said in a statement on Sunday night that it would move towards a listing of the new company in 2015. The first step of the spin-off will involve Eon transferring a majority of the new company's capital stock to its shareholders. 

The minority stake will be sold by Eon over the medium term. Following the split, Eon will focus on renewables, distribution networks and customer services. About 40,000 employees will be assigned to this company. 

The new company, which will have its headquarters in the Rhine-Ruhr region of Germany, will be assigned 20,000 employees. Eon's headcount at the end of last year stood at about 62,000. 

Eon expects to carry out the spin-off after approval at the shareholders meeting in 2016. In its statement, Eon confirmed the divestment of its businesses in Spain and Portugal, which it has agreed to sell to Macquarie, the Australian infrastructure investor, for an enterprise value of €2.5bn. 

Eon is exploring the disposal of its assets in Italy and is reviewing the future of its exploration and production business in the North Sea. Mr Teyssen said: "We firmly believe that creating two independent companies, each with a distinct profile and mission, is the best way to secure our employees' jobs. Our new strategy therefore isn't a job-cutting programme." 

Eon will increase investment by about €500m, against the previously planned 2015 capex of €4.3bn. The company will emphasise expanding its wind business and will upgrade distribution networks in Europe and Turkey to allow customers to use new products in areas such as energy efficiency. The board is proposing a dividend of €0.50 a share for both the 2014 and 2015 financial years. 

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Eon's dividend for the 2012 financial year was €1.10 a share.

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