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E.ON unveils cost cuts to reach earnings target

  Germany’s E.ON, the world’s second-largest utility, unveiled cost-cuts of €1.5 billion ($1.9 billion) to help reach its annual targets and make up for lower profit growth due to the economic crisis.

The company is also writing down the value of its US business by €1.5 billion as financing costs rise and economic growth shrinks and of its Italian unit by €1.8 billion due to regulatory measures and problems with power plants, it said on Tuesday.

The double-writedown is the strongest hit yet to be taken by any European power group due to the recession. “The cost cuts will have been necessary to reach their 2010 earnings targets,” said Unicredit analyst Karin Brinkmann. “The new Italian business is not living up to the high expectations E.ON had for it,” she said.

The shares underperformed those of other utilities. They were down 0.5% at €24.90 at 1237 GMT, while the DJ Stoxx European utilities sector index was up 0.3%.

Mario Kristl, an analyst with DZ Bank, said the news was a negative surprise but E.ON’s operating business had performed well nonetheless.

CEO Wulf Bernotat warned that the efficiency campaign, which runs through 2011, could include cuts in jobs. The market doubts right now that Bernotat will be able to reach his target of adjusted earnings before interest and tax of €12.4 billion in 2010.

Twenty-six analysts on average estimate E.ON will only post an adjusted EBIT of €12.2 billion, according to Reuters data. “The cost-cutting program might help to convince investors that E.ON will be able to achieve their target,” said Landesbank Baden-Wuerttemberg analyst Bernhard Jeggle.

The German power group said it would increase its dividend by 9.5% -- adjusted for a stock split -- to €1.50 per. E.ON also said it expected adjusted pretax earnings in 2008 to beat the previous year by 7 to 8%, with a smaller rise in adjusted net income. (Reuters)