EON AG plunged the most in a year after Germany's largest utility scrapped profit forecasts and said the shift to renewable energy presents "huge challenges."

The Dusseldorf-based company said today it may have to cut dividends and close power stations because lower electricity prices in Germany are making it difficult for gas-fired plants to make money. EON is reviewing forecasts for the next three years because existing targets are no longer achievable.

“We face huge challenges, particularly in our generation business,” Chief Executive Officer Johannes Teyssen said today in an earnings statement. “We’re further optimizing our conventional generation portfolio and also exploring whether to close some assets.”

Germany’s shift to renewables has helped cut wholesale power prices 15 percent this year as wind turbines contribute more electricity to the grid. EON has already seen earnings trimmed by Chancellor Angela Merkel’s decision to close all nuclear power plants after lasts year’s Fukushima disaster.

The shares dropped as much as 11 percent in Frankfurt, the most in more than a year. The stock traded down 1.75 eurosat 14.80 euros at 12:26 p.m. local time.

EON today reported underlying net income, the profit measure the company uses to calculate its dividend, advanced to 4.04 billion euros ($5.1 billion) in the first nine months from 1.59 billion euros a year earlier. That beat the 3.53 billion euro average estimate of four analysts compiled by Bloomberg. Sales were up 21 percent to 93.6 billion euros from a year earlier.

Economic Uncertainty

Underlying net income rose 11 percent to 722 million euros in the third quarter. Sales were up 15 percent to 28.23 billion euros. Both numbers were calculated by subtracting half-year earnings from nine-month results published today.

EON said yesterday its 2013 forecast of 3.2 billion euros to 3.7 billion euros of underlying net income is no longer achievable. The company is considering cutting dividend payments because of the “substantial economic uncertainties and structural changes in the energy industry.”

The company confirmed its outlook for 2012 profit of 4.1 billion to 4.5 billion euros this year.

‘Disastrous Communication’

“I consider the communication as disastrous,” said Thomas Deser, a portfolio manager at Union Investment GmbH responsible for the fund’s 0.71 percent stake in EON, according to data compiled by Bloomberg. “Even for the dividend there is no reliable lower limit. Shareholders don’t play the same important role for EON as bond holders and rating agencies do.”

RWE AG, Germany’s second-largest utility, reports earnings tomorrow and dropped as much as 4.4 percent in Frankfurt trading.

“The question is by how much EON will reduce the profit forecast and the dividend for 2013,” Sven Diermeier, an analyst at Independent Research GmbH, said by phone from Frankfurt. Ratings agencies may have to look at the company’s credit profile if EON isn’t able to reduce debt as planned, he said.

German power prices for next year have declined 15 percent this year to 47.10 euros a megawatt-hour, according to data compiled by Bloomberg. “That causes difficulty” for EON, while power from offshore wind farms will continue to increase the offer, Deser said. The increase of wind and solar power “pushes RWE and EON out of the business.”

As Germany takes reactors offline, it’s pledged to meet power demand with more fossil-fuel-fired plants and alternative energy. EON is raising investments in renewable-power generation and wants to expand in Brazil and Turkey.

Copyright 2012 Bloomberg

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