E ON : new strategy fully reflected in its balance sheet

Overview

E.ON has now fully accounted for the impact of its new strategy. Its balance sheet for the 2016 financial year will be the last to reflect the burdens of the past. This clean break clears the way for the company's healthy core operating businesses-energy networks, customer solutions, and renewables-to grow in the future.

The main items were the successful Uniper spinoff and the agreement with the German federal government on funding the phase-out of nuclear energy. Both items left deep marks on the company's balance sheet but also paved E.ON's way into the new energy world.

'2016 was a transitional year. The impact on our balance sheet marks a turning point and clears E.ON's way into the new energy world. It enables us to focus all our energy on our three core businesses: energy networks, customer solutions, and renewables,' said E.ON CEO Johannes Teyssen, summarizing the year's significance.

All the members of the E.ON SE Management Board were on hand in Essen to present the company's 2016 results, its outlook for 2017, and the latest development in its core businesses (energy networks, customer solutions, and renewables).

Healthy core operating business

E.ON's core operating business was characteristically robust in 2016. Adjusted EBIT for the E.ON Group of €3.1 billion was at the upper end of the guidance range (€2.7 to €3.1 billion) and below the prior-year figure. Adjusted net income of €904 million was likewise at the upper end of the guidance range (€0.6 to €1 billion) and below the prior-year figure. Factoring out prior-year earnings from businesses that have been sold, adjusted net income rose by about 10 percent. E.ON's core businesses recorded adjusted EBIT of €2.5 billion, slightly less than the prior-year figure which had benefited from positive one-off items. E.ON generated about 65 percent of its earnings in regulated or long-term contractual businesses.

Aiming for dividend growth

The Management Board will propose to the Annual Shareholders Meeting that the company pay out a dividend of 21 cents per share for the 2016 financial year. This would be in the middle of the announced range of 40 to 60 percent of adjusted net income. E.ON intends to increase the dividend by about 45 percent and pay out a fixed dividend of 30 cents per share for 2017. The company aims to increase its payout range to 50 to 60 percent of adjusted net income, providing dividend growth for years after 2017. 'The upward adjustment of our dividend policy for the subsequent years demonstrates that we'll continue to keep our shareholders' interests firmly in view in the future as well,' future CFO Marc Spieker said.

Business segments deliver solid performance

Energy Network's adjusted EBIT declined primarily because of the non-recurrence of positive one-off items recorded in Germany in 2015. By contrast, its earnings in Sweden and East-Central Europe/Turkey were higher.

Customers Solutions' adjusted EBIT was at the prior-year level. The earnings decline in Germany is principally attributable to the non-recurrence of positive one-off items recorded in 2015. Earnings in Germany were also adversely affected by higher customer-acquisition costs, higher Renewable Energy Law levies, higher network fees, and costs for the further buildup of the customer-solutions business. Adjusted EBIT in the United Kingdom was higher despite a weaker British Pound in the wake of the Brexit vote. This positive performance is primarily attributable to lower costs in conjunction with government-mandated energy-efficiency measures.

The Renewables segment posted higher earnings, mainly because Amrumbank West and Humber Gateway offshore wind farms were, for the first time, in operation for the entire year.

Core business freed of past burdens and risks

The successful Uniper spinoff necessitated impairment charges totaling about €11 billion. In view of Uniper stock's positive performance since its listing, the disposal proceeds from the planned future sale of E.ON's remaining Uniper stock could have a positive impact.

In addition, accounting standards required E.ON to record about €3.6 billion in earlier currency losses at Uniper businesses as a loss on its own income sheet when it deconsolidated Uniper.

E.ON will also make a one-time payment of around €2 billion for the agreement with the German federal government on the funding of the country's phase-out of nuclear energy. Germany's two houses of parliament passed the relevant law at the end of last year. The accompanying agreement with the German federal government is ready for signing. The German federal government will assume responsibility for the intermediate and final storage of nuclear waste, relieving the company and its shareholders of this perpetual risk. In return, E.ON will pay about €10 billion into a state-run nuclear energy fund in mid-2017. This payment will be funded primarily with available liquid funds and securities. As already communicated, E.ON has a comprehensive financing plan in place for any additional liquidity needs.

Teyssen: 'The law and agreement represent an expensive and painful solution, but one that also provides clarity for the future and relieves us of perpetual risks. In our view, the solution is therefore acceptable. Ultimately, it's in the interest of the company and its shareholders for the responsibility for intermediate and final storage to be definitively clarified and for it to be no longer borne by the companies operating nuclear power stations.'

Altogether, these one-off items resulted in a net loss of about €16 billion for 2016. In return, however, the company is completely relieved of past burdens. With the exception of the nuclear risk surcharge, none of the loss is cash-effective.

Transfer of Uniper stock reduces equity

The impact of the Uniper spinoff, adjustments to the provisions for nuclear asset-retirement obligations, and the increase in pension obligations due to the current low-interest environment caused E.ON's equity to decline significantly to €1.3 billion at year-end 2016.

The spinoff involved E.ON transferring a majority of Uniper stock to its shareholders. This reduced the company's equity by about €3.7 billion. The equity shown on E.ON's balance sheet does not sufficiently reflect its earnings strength and thus its true value. The capital market, which bases its calculations on the earnings strength of a company's businesses, values E.ON at close to €14 billion.

Package of measures to reduce debt

E.ON's economic net debt of €26.3 billion at year-end 2016 was above the pro forma figure of €21.3 billion for year-end 2015, which was adjusted to exclude the Uniper stake. The increase is primarily attributable to the transfer of responsibility for nuclear-waste storage to the German federal government, the significant increase in the remaining provisions for nuclear asset-retirement obligations, and the low interest-rate environment and the resulting increase in pension obligations at the balance-sheet date required by IFRS.

E.ON has put together a package of measures to reduce its debt by about €7 billion to about €20 billion and increase its equity over the medium term. As announced, E.ON wants to fund the nuclear risk surcharge of roughly €2 billion with capital measures. Possible options are a capital increase of up to 10 percent (ABB) and the issuance of hybrid bonds. Other measures such as the sale of Uniper stock, the transfer of the company's stake in the Nord Stream 1 pipeline into a pension fund, the optimization of nuclear decommissioning costs, the sale of non-strategic businesses, and a scrip dividend have the potential to reduce E.ON's debt by €5 billion. In addition to these measures, E.ON will focus resolutely on operating efficiency and disciplined capital allocation. Consequently, E.ON has reduced its investment budget for the current three-year period by €2 billion, or 20 percent, to €8 billion.

Phoenix program to deliver customer-centric setup and €400 million in cost savings; moderate, socially responsible workforce reduction

The Uniper spinoff places E.ON's entire strategic focus on the future businesses of the new energy world. A program called Phoenix will now make the company's setup and processes more customer-centric, thereby tailoring them to the requirements of the new energy world. E.ON will delegate more decision-making authority to frontline functions and integrate support functions like IT and procurement more closely into its operating business. By 2018, Phoenix will permanently reduce E.ON's annual costs by €400 million. Restructuring will eliminate a range of tasks, resulting in up to 1,300 redundancies across the company, of which about 1,000 will be in Germany. This amounts to around 3 percent of E.ON's current workforce of 43,000 employees.

E.ON aims to work with employee representatives to find mutually acceptable solutions for employees affected by redundancy. The mechanisms include early retirement, fair severance compensation, and secondment to a qualification and transfer company for up to four years. 'The moderate workforce reductions that have now become necessary will play a key role in making jobs at E.ON secure for the future,' Teyssen said. 'We need to change E.ON in fundamental ways, but we'll do so with the greatest possible respect for our employees. This part of our corporate culture has not changed. We have not lost our social conscience.'

2017 outlook

E.ON expects its 2017 Group adjusted EBIT to be between €2.8 and €3.1 billion and its 2017 adjusted net income to be between €1.2 and €1.45 billion. In addition, the company expects to achieve a cash-conversion rate of at least 80 percent and ROCE of 8 to 10 percent.

This press release may contain forward-looking statements based on current assumptions and forecasts made by E.ON Group Management and other information currently available to E.ON. Various known and unknown risks, uncertainties and other factors could lead to material differences between the actual future results, financial situation, development, or performance of the company and the estimates given here. E.ON SE does not intend, and does not assume any liability whatsoever, to update these forward-looking statements or to conform them to future events or developments.