Eneco records satisfactory result in challenging market

Net profit up

Eneco Holding N.V. recorded a net profit of € 233 million in 2012, an increase of € 29 million (14%) compared with 2011. Revenues were up by 5% from € 5,007 million to € 5,256 million. Gross margin and other operating revenues (non-energy revenue) improved by € 184 million (11%) to € 1,794 million. The acquisitions of Oxxio and the remaining 50% interest in the Prinses Amalia Wind Farm (PAWF) in 2011, the expansion of selling activities in Belgium and higher transmission tariffs played a major role in this.

Operating expenses excluding depreciation, amortisation and impairment rose by € 119 million to € 1,018 million, partly as a natural outcome of the expansion of activities, such as the acquisitions of Oxxio and the remaining 50% interest in PAWF and bringing the gas-fired Enecogen power plant, the Gasspeicher gas storage facility and several wind farms on line. There was also a rise in maintenance and operating costs for the network activities, caused in part by additional repair costs and compensation following power cuts. Greater competition, adverse trends in market prices and the economic crisis as well as the investment in expanding our position in the Belgian market, the rollout of the Toon smart thermostat and the development of new wind farms also resulted in higher costs. Additions to provisions increased in 2012 as a result of adverse market price changes and the economic crisis: more customers (business and domestic) defaulted on payments. A provision was also formed in connection with a restructuring of the engineering activities.

At € 776 million, operating income before depreciation, amortisation and impairment (EBITDA) was 9% higher than the previous year (€ 711 million). Eneco Group is focusing on cost reductions, which will be made across the board. We have drawn up a programme that will lead to considerable savings in the next few years, giving Eneco scope to maintain a high level of investment in new renewable energy production and good networks.

Investments

Eneco Group is reinforcing its sustainability ambitions by creating a diversified portfolio of renewables assets. In 2012, Eneco invested € 120 million in several wind farms in the Netherlands, Belgium and the United Kingdom and € 103 million in the construction of the Golden Raand biomass power station in Delfzijl. Replacing, expanding and increasing the sustainability of district heating networks absorbed € 32 million in 2012. The acquisition of and investment in solar farms in France and Belgium involved € 50 million. Eneco Group invested a total of € 712 million in property, plant and equipment (2011: € 737 million), including € 367 million for replacement and expansion of the gas and electricity networks.

Operating profit and net profit

The operating profit was € 335 million, 14% down on the previous year when it had been € 388 million. In respect of market prices, it is expected that the current poor relationship between gas and electricity prices (‘spark spread’) and the low prices for CO2 rights will continue for some time. This has led to an impairment of € 78 million on electricity-related property, plant and equipment.

The share of profit of associates included non-recurring income of € 56 million in connection with the sale of the interest in KEMA. Net financial expenses rose by 9% to € 88 million (2011: € 81 million), partly because more interest for projects under construction could be capitalised in 2011. Income tax fell by € 24 million to € 50 million because of the lower operating profit combined with higher interest charges and a tax refund on discontinued operations.

The overall net profit for Eneco Group rose by 14% from € 204 million to € 233 million.

Production, trading and supply

In 2012, we entered into a strategic alliance with the French company EDF for the development of the large offshore Navitus Bay wind farm in England. This type of partnership is a significant part of our strategy as it allows us to diversify our investments and risks and develop renewables projects. An offshore wind alliance was formed with Mitsubishi Corporation of Japan in early 2013. We also entered into a contract with waste processor AVR which will allow waste heat from the Rijnmond waste processing energy plant to be put to good use to heat homes and buildings saving 95 kilotonnes of CO2 emission each year.

Compared with 2011, EBITDA on production, trading and supply activities rose by € 32 million to € 282 million (2011: € 250 million). The outlook for the relationship between gas and electricity prices (spark spread) combined with low CO2 prices is to the detriment of less polluting gas-fired electricity generation. Wind conditions were less favourable than in 2011 and below the long-term average.

Competition in the supply market is fierce. Eneco is distinctive in its Sustainable, Decentralised and Together strategy, which is being put into practice with the successful introduction of the HollandseWind, Toon and Zon&Zeker consumer products. Eneco is further expanding its share of the retail market in Belgium with an active market approach involving investment in intensive market campaigns and expanding the organisation there in 2012.

Network and engineering activities

In 2012, our grid administrator Stedin started the construction of a steam network which allows companies in the Port of Rotterdam area to exchange steam and so achieve considerable savings in energy and reductions of CO2 emissions. The first phase will be completed in 2013; a second phase connecting more companies will follow. We are also investing significant sums replacing, modernising and increasing the sustainability of the existing electricity and gas networks. Overall, EBITDA on network and engineering activities were € 521 million in 2012, almost the same as the € 515 million in 2011.

Total revenues of the network activities were up € 93 million, mainly as a result of the required transmission tariff changes in 2012. Purchase and transmission costs rose by € 53 million, partly because of higher prices for transmission purchases, depreciation of network constructions, IT projects, higher network operating costs, buying out cross-border lease agreements and compensation for power cuts.

Engineering activities were hindered by the economic crisis with less work in the contract market as a result of fierce price competition. Revenue for activities outside Eneco Group grew in 2012 compared with 2011 but overall activity fell, leading to lower margins and a disappointing utilisation rate. We took several steps to face up to this situation, including a reorganisation of the direct and indirect workforce, and developed plans for process improvements, cost reductions and co-operation. In December a restructuring provision was formed for € 16.5 million.

Outlook

We have confidence in the further development of the business but in view of the major external uncertainties we are not making a forecast of the result for 2013.