E.ON AG (OTC:EONGY)

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E.ON AG (NASDAQ:EONGY, ETR:EOAN) is a German energy company with global upstream and downstream natural gas and electricity operations (upstream is involved in production, downstream is involved in marketing, distribution and refining). As a utility company (provides water and electricity) it is a major player in Germany and Central Europe (E.ON Energie (also sells natural gas) has 17 million customers, 28,750 MW generating capacity, a leader in Germany along with RWE, 3rd largest power producer in Belgium). It also has a siginificant gas business (produces, refines, markets, distributes and sells) that it runs directly (and through subsidiaries like E.ON gas in the UK and Hungary) or through minor stakes in very large companies like Gazprom (like the 3.5% $4 billion interest that it had in Gazprom that was sold December 1, 2010 to Vneshtorgbank for $4.5 billion, €3.4 billion).^[1][2] Even though it is the 2nd largest CO2 emitter in Europe and has raised criticism by attempting to open the UK's first new coal plant in 30 years, it has a growing renewable energy business (in 2009 introduced a directive of bringing generating capacity from renewable fuels to 24% by 2030), as of August 2010 its 1st concentrated solar plant (CSP) was half completed, hasn't sold US Renewable Energy business despite spinning off large portions of other American subsidiaries)^[3][4][5] In Rotterdam its new coal plant is one of the most efficient in the world (thermal efficiency of 46%). It has 1 million km of distribution networks (112,000 for natural gas), a gas supply of 624.1 billion kWh (Norway and Russia have over half), generation capacity of 73 GW (renewable energy is 3.1 GW) and produces 1.4 billion cubic meters of natural gas annually.^[6]

Contents 1 Company Overview 1.1 Business & Financials 2 Production 3 Trends & Forces 3.1 Declining Gas Production Rates In Europe 3.2 Cap & Trade/E.ON one of Europe's largest emitters 4 Competition 5 References

When used 1h10 means 2010 first half

Company Overview

The company has traditionally been divided up into 7 market units however more recently the company has started dividing up the 7th market unit (New Markets) into 4 due to the size and growing importance of each one. The business segments (all are called market units) are thus;

• Central Europe Market - Present in 9 European countries; Germany and Hungary are the 2 largest markets. Operations within this segment involve the production and selling of electrical power as well as the selling of natural gas, which includes everything the company does except for energy trading and natural gas production.
• European Gas Market - Supplies natural gas primarily to 5 markets; Norway gets 27% of the gas supplied, Russia 26%, Germany 22%, Netherlands 15%, Denmark 3%, the other 7% goes elsewhere. The unit also produces natural gas mostly through interests in gas fields much of it operating under subsidiary E.ON Ruhrgas.
• UK Market - UK centered/focussed division that produces, sells, distributes (2nd largest distribution system in the UK) and markets power (made using natural gas, oil (61%) and coal (39%) as fuels) and sells natural gas to customers (7.9 million) in the UK (2nd biggest power producer, top supplier of power and natural gas). Because the UK is bound by EU carbon cutting commitments/15-30% of energy from renewables by 2020, E.ON has to change the way it produces energy.
• Nordic Market - Swedish producer and distributor of power and gas to 1 million customers. In 2009 88% of power generation came from clean energy (nuclear, hydro about half each). 90% of residential buildings in Stockholm, Sweden are heated by E.ON.
• U.S. Midwest - Produces power largely at coal fired plants (98%). Also sells natural gas.
• Energy Trading - buys and sells electricity, natural gas as well as the fuels used to produce power (oil and coal) on wholesale energy markets and carbon allowances. The division helps the company manage costs by ensuring the energy it uses are purchased at competitive prices which are then passed on to customers. Proprietary trading tactics (uses its own money instead of the clients to improve company earnings) are also employed.
• 4 market units comprise New Markets - started in 2008
• Climate and Renewables - 96% of power production is from wind. 50% increase in capacity in 2009. Starting to put more emphasis on solar energy (until its own solar energy business becomes sizeable a lot of the focus is expected to be on joint ventures and partnerships)
• Russia - Produces and sells power in Russia. Operates the biggest power station in Eurasia. At over 53 billion kWh it generates more power than every other market unit except Central Europe (130.4 billion kWh).
• Italy - 4th largest producer (60% from oil, natural gas) and 4th largest seller of power in the country.
• Spain - 91% of production is from gas and coal.

Business & Financials

Key Financial Metrics (€ million)	2005	2006	2007	2008	2009	1HFY09	1HFY10	% Change (Interim 09-10)
Revenue	56,141	67,759	68,731	86,753	81,817	41,520	44,304	6.71%
EBIT	7,132	5,133	10,455	4,934	14,266	7,231	7,817	8.10%
Total Assets	126,562	127,232	132,294	156,824	152,636	155,171[7]	154,034	(-)0.73%
Net Income	7,407	5,057	7,224	1,621	8,645	4,193	4,169	(-)0.57%
Gross Profit	11,013	11,893	12,912	15,204	14,373	7,278	8,169	12.24%
Earnings/Share	6.61	7.48	3.52	0.75	4.41	2.29	2.45	6.99%
Market Capitalization	57,600	67,600	92,000	54,200	55,700	48,000	52,100	8.54%

• Data for 2005, 2006^[8] 2007, 2008^[9] 2009^[10] 1HFY09, 1HFY10^[11]
• Gross Profit = Sales - (Cost of Materials + Personnel Costs)

2010 First Half revenue was 6.7% higher than the same period in 2009 despite a 12% decrease in European Gas sales (due to lower prices and volume of product sold, regulated sales were down 21%, total exchange rate differences contributed €3.61 billion to operating income compared to €5.987 billion in 1hfy09). Much of the increase is the result of fewer losses attributed to Corporate Center (down to €19.9 billion from €24.7 billion in 1hfy09). Higher prices, sales and improved foreign exchange rates helped the Energy Trading and Nordic divisions. Non regulated gas business showed a reduction in revenue by about five percent due to lower prices (the amount of gas sold was higher though). Results from upstream gas operations were boosted by the addition of the Yuzhno Russkoye gas field in Russia (Thuga was sold in 2009). Central Europe's earnings results suffered from the loss of energy generation capacity sold in the previous period. Energy trading was stable at €21 billion despite lower prices while Nordic operations improved markedly, rising 32% and UK sales were 5% lower (despite a 27 million euro increase in regulated sales a result of higher tariffs and volumes).

Revenue from the Climate and Renewables business was 31% higher (even though prices were lower) due to higher capacity abroad in the US and Italy (though Italian operations had less business coming from energy trading) and higher electricity prices and colder weather in Russia (where sales were 40% more than the corresponding period in 2009). Adjusted EBIT rose €591 million or 10.77% (the result of better retail, energy trading margins (specifically in Russia and Spain) and a higher generation capacity.

Other factors affecting results

• 2.68% rise in personnel costs, 5% increase in depreciation (mostly from intangible assets), 5.76% increase in material costs, 51.73% reduction in derivative financial instruments expenses.

2009 Sales fell 6% because of a lower volume of gas sales, lower volume of nordic nuclear and hydro production and lower gas prices. Numbers for Central Europe operations were affected the changing of divisions for French operations (segmented differently than the year before) and Romanian gas operations. Currency and price effects as well as volume changes due the economic climate were instrumental in bringing European Gas revenue down 25%. New Markets was the only market unit to record a significant increase in numbers rising 32% overall (Spain 144% growth though Russia fell 7%) in sales and tripling adjusted EBITDA.

Production

Power sold (net of owned generation, purchases and station use, line loss) in sectors and countries represented by New Markets rose from 16.2 to 93.1 between 2007 and 2008. 2007 to 2008 owned generation in new markets increased from 15.9 to 75.2 billion kWh.

2009 generation capacity was 2% lower than the previous year mainly due to minor changes in the nordic region due to the transfer to Statkraft and Italy (fell 1,450 MW because of the transfer of power stations to A2A) although Climiate and Renewables rose by about 50% (978 MW) due to increased capacity in the US. In 2009 electricity production increases came in Belgium (asset swap with gdf suez gave it 900 MW's of increased capacity) and in France (asset swap with Electricite de France gave it procurement rights and complete ownership of SNET, France's only non state owned generation company).

Production started at the Rita gas field (200 million cubic meters annually) which is supplying Britan with natural gas.

Market access in Germany was expanded as a result of NetConnect Germany, a new company formed by E.ON Gastransport and Bayernets as a joint venture. Gas pipeline networks in Germany were subsequently merged with those of other companies creating the biggest pipeline network in Germany improving market access for the sale of gas. 1hfy10 half of gas sales were made by E.ON Ruhrgas AG 1hfy10 owned generation was steady but saw major decreases in Italy (6.2 from 8.1) and Spain (4.6 from 5.4) but major increases in Climate & Renewables (3.8 from 2.5) and Russia (27.7 from 26.1 bil kWh). ^[12] The company also participated in a 12 month field test in electromobility by providing hybrid car recharging stations.

Trends & Forces

Declining Gas Production Rates In Europe

Declining rates of gas production in Europe have pressured E.ON to seek more sources abroad and to target a production rate about 9 times higher than now.^[13][14][6]

Cap & Trade/E.ON one of Europe's largest emitters

E.ON is one of the largest carbon emitters in Europe among companies.^[15] If the company surpasses its allowance it would be fined €100 per ton.^[16] Emissions are measured in units of Certified Emission Reduction (CER).

Competition

Company	Revenue (€ millions)	Generating Capacity	Power Stations (wind farms)	Net Income
Electricité de France	95,072 [17]	127 [18]	3 (2) [19]	5,858 [20]
GDF Suez	83,035	72.7	na	4,475
E.ON	81,817 [21]	68.475 (2010) 73 GW 2009[22]	23 (19) [23]	8,645 [24]
Scottish and Southern Energy	£ 25,424 [25]	11.1 GW [26]	20 (9) [27]	£ 1,186[28]
RWE AG	47,741[29]	49.58 GW [30]	35 (21) [31]	3,571 [32]

References

1. ↑ E.ON May Sell Stake in Gazprom (2010-06-28).
2. ↑ Eon offloads its 3.5% stake in Gazprom (2010-12-01).
3. ↑ Abengoa Solar and E.ON halfway on Spanish CSP plant
4. ↑ E.ON to Sell US Assets to PPL for US $7.6B
5. ↑ Exclusive: E.On Not Selling U.S. Renewable Energy Business
6. ↑ ^{6.0 6.1} Annual Report 2009 page 13
7. ↑ Interim Report 2009
8. ↑ Annual Report 2006
9. ↑ Annual Report 2008
10. ↑ Annual Report 2009
11. ↑ Interim Report 2010
12. ↑ bayernets Eni Gas Transport Deutschland S.p.A. (Eni D), E.ON Gastransport, GRTgaz Deutschland and GVS Netz merge their market areas (2009-08-26).
13. ↑ Europe and natural gas - Are tough choices ahead?
14. ↑ Europe and Russia Natural Gas
15. ↑ Carbon Market Data publishes the EU ETS Company Rankings 2009 (2009).
16. ↑ EU Carbon at 11-Month High as Emitters Face Deadline to Comply (2010-04-30).
17. ↑ EDF 2009 Annual Report
18. ↑ EDF Financials Hoovers
19. ↑ EDF Energy Generation
20. ↑ EDF 2009 Annual Report
21. ↑ E.ON Annual Report 2009
22. ↑ E.ON Annual Report 2009
23. ↑ E.ON Statistics: Portfolio
24. ↑ E.ON Annual Report 2009
25. ↑ SSE Annual Report 2009
26. ↑ S & S Power Generation
27. ↑ S & S Generation Portfolio
28. ↑ SSE Annual Report 2009
29. ↑ RWE 2009 Annual Report
30. ↑ RWE Power Generation
31. ↑ RWE Sites UK
32. ↑ RWE 2009 Annual Report