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E.ON claims UK retail business will stay profitable as Ofgem lowers price cap

German utility E.ON SE is signaling that it will stick with its troubled U.K. retail business despite a continued exodus of customers and a regulatory price cap that led to a significant drop in earnings for the company during the first half of the year.

E.ON reported adjusted EBIT of €1.72 billion for the first six months of 2019, down 12% from the same period last year, despite first-half revenues that were up 5% to €16.09 billion. The decline in overall earnings was mostly due to a steep drop in U.K. retail, where EBIT fell by 65% to €71 million, according to E.ON CFO Marc Spieker.

But Spieker insisted that the company can avoid slipping into a net loss in Britain, arguing that cost cuts and a softer stance from the regulator could see the situation stabilize in the months ahead.

"The U.K. market is undoubtedly difficult but by no means without prospects," he told journalists Aug. 7. For the whole year, "we clearly expect black numbers," he added.

This is despite U.K. energy regulator Ofgem announcing on Aug. 7 that the price cap will drop slightly for the period from October to March to reflect falling wholesale energy costs. On a separate call with analysts, Spieker said E.ON would adjust its fuel hedging to deal with the increased pressure and still expects the U.K. business to reach a mid-double digit EBIT result this year.

The price cap was introduced by the government in January to crack down on high tariffs from the Big Six energy suppliers, which are owned by E.ON, Centrica PLC , Electricité de France SA, innogy SE, Iberdrola SA subsidiary Scottish Power and SSE PLC. Outgoing Centrica boss Iain Conn last month cited the price cap as one of the main reasons for cutting the company's prized dividend.

The cap has added to an already challenging environment in the U.K., where many large suppliers have been hemorrhaging customers to smaller and often cheaper rivals. E.ON said it lost approximately 170,000 customers in the country between April and June, adding to 230,000 that switched supplier during the first quarter.

Spieker said the customer losses, which were partly offset by gains in Germany and Italy, have slowed down recently. He also sees the competitive environment becoming slightly more favorable after Ofgem tightened entrance rules for new suppliers and said that measures like a recently announced initiative to switch all of E.ON's residential customers to renewable tariffs will help turn things around.

"These are measures with which we can be successful even in a difficult market," he said, adding that the situation would nonetheless have to change in the long-term. "We consider the situation in the U.K. to be a special case triggered by the British regulator and we do not think that is sustainable."

In E.ON's other businesses, production from new wind farms lifted adjusted EBIT in the renewables segment by €39 million over the previous year and made up for a €31 million decline in the networks business, which was driven by return cuts in Germany.

Analysts said the overall results were broadly in line with market expectations. But Deepa Venkateswaran, an analyst at Alliance Bernstein, said that despite a stop to the constant customer losses in the U.K. in July, customer solutions remains "the weak point" in E.ON's overall business.

E.ON is facing additional pressure because it stands to receive innogy's U.K. retail arm NPower — which has been hit equally hard by the price cap — as part of a complex €40 billion asset swap with German rival RWE AG.

The deal is currently under review by the European Commission and Spieker said E.ON expects an approval from the competition watchdog in September after the company offered a series of concessions that involve selling some of its retail operations in Hungary, Germany and the Czech Republic.

Innogy has been trying to get rid of Npower and said earlier this year that it expects to post a loss of €250 million for the division in 2019. E.ON won't say whether it will try to sell the unit right away but Spieker said the company would not hold onto a "sustained loss-making business." He said E.ON will lay out its plan for how to deal with the issue after the takeover of innogy is complete.