The gross margin fell from CHF 810.4 million to CHF 648.8 million (– 20%) due to the outage at the French nuclear power plant at Bugey, the weakness of the euro against the Swiss franc and the difficult environment in the European energy markets. The latter is not only influenced by the economic changes but is also undergoing a fundamental transformation as a result of increasing regulatory intervention.
On the cost side, other operating expenses increased by 8 per cent to CHF 252.7 million, mainly due to exit costs of CHF 47.4 million arising from failure to sell the Energy Plus power plant project. Personnel expenses were also up 8 per cent to CHF 162.3 million due to expansion of the workforce in the first half of the year. Fifty jobs were eliminated in the second half of the year as a result of the unsatisfactory earnings situation. The effects of this cost-cutting measure will not be felt until the 2010/11 financial year.
The EGL Group was able to keep cash flow from operating activities (CHF 111.9) at a solid level compared to net income. Gearing (debt level) is also solid at 43.1 per cent.
Energy Trading & Origination: Challenging market environment
Energy trading markets continued to be impacted by the economic crisis. Demand for electricity in EGL’s key markets was 5 to 10 per cent below the previous-year figure. Against the backdrop of a difficult market environment, EGL’s trading was less successful overall than in the previous year. Although the company did manage to achieve a solid gross margin in local currencies, the weak euro and high operating expenses led to a significantly lower operating result of CHF 110.6 million (– 56.2%).
Assets: Focus on selected projects
The exit costs in connection with the Energy Plus power plant project and the outage in Block 3 of the Bugey nuclear power plant put a strain on the otherwise positive results of the Assets division. All other EGL power plants continued to operate reliably and were successfully integrated in EGL's energy trading portfolio. EGL also invested in the Global Tech I wind farm project in the North Sea off the coast of Germany as well as in the La Peñuca wind farm in Spain. Norwegian grid operator Statnett became the new partner in the NorGer undersea cable project between Norway and Germany.
In October 2010, the SE Ferrara gas-fired combined cycle power plant in Italy (EGL stake: 49%) went into full commercial operation. The Assets division ended the year with an operating result of CHF 107.5 million (– 41.6%).
Gas Supply & SEE: Natural gas business burdened by surplus and low demand
A surplus coupled with falling demand led to a separation of oil and natural gas prices and to some negative sales margins. In the meantime, EGL has been able to negotiate improved purchasing conditions with producers. In July 2010, E.ON Ruhrgas joined the Trans Adriatic Pipeline (TAP) natural gas pipeline project. The Gas Supply & SEE division ended the year with an improved year-on-year operating result of CHF – 37.2 million (+ 20%).
Grid valuation and EU electricity agreement: Decisions still pending
A definitive evaluation of the EGL transmission system in Switzerland, which is crucial for defining chargeable costs as well as the value of the transmission system, is still outstanding. EGL’s appeals against the low evaluation reached by ElCom are still pending with the Federal Administrative Court. The second pending decision concerns the electricity agreement between Switzerland and the EU, which is still under negotiation and which is expected to lay down new regulations for grid access for cross-border electricity trading between France and Switzerland, among other things. A solution needs to be found that will protect EGL's investments.
Cost-cutting measures and strategy implementation
In the 2009/10 financial year, EGL reduced various expenses through targeted cost management. For example, since March 2010 the workforce was reduced significantly; at the Central and Eastern Europe trading hub based in Dietikon, changes are to be made to structures and processes in trading and in the back office by the end of 2010. Further cost reductions will follow in the 2010/11 financial year.
At a strategic level, EGL has a much stronger focus. In energy trading, EGL is concentrating on expanding its customer business with structured products and innovative services (origination). This area offers good growth opportunities and generates recurring, sustainable income which should cushion the effect of the volatile earnings from proprietary trading. The Asset portfolio is developing in line with earnings and at a slower pace. The main focus is on projects which support EGL’s trading activities thanks to their flexible nature. In the natural gas business, value is increasingly being attached to a combination of procurement sources and applicable price formulas (oil and spot price fixing) in order to achieve a satisfactory margin. These measures will enable EGL to react more flexibly to changes in the energy markets while continuing to occupy attractive niches and more rapidly exploit opportunities that arise. "We have analysed developments carefully and charted our course. With a focused strategy and cost-cutting measures, we will achieve sustainable profitability," says Hans Schulz, CEO of the EGL Group.
Changes on the Board of Directors
Having reached the age limit of 65, Benedikt Weibel will no longer be eligible for re-election at the Annual General Meeting on 24 January 2011. As a result, the Board of Directors has decided to reduce the number of members to five. Hansueli Sallenbach will therefore also not be standing for another term of office on the Board of Directors. The five existing members Heinz Karrer (Chairman), Rolf Bösch (Vice Chairman), Peter Derendinger as well as Dominik Koechlin and Andrew Walo will stand for re-election.
Dividend unchanged
The Board of Directors will propose to the Annual General Meeting of Shareholders an unchanged dividend of CHF 18 per share.
Outlook
EGL expects the business environment to remain challenging throughout this financial year. Any forecast would therefore be subject to a high degree of uncertainty. EGL has so far made a good start to the current year. On the cost side, the planned cost-cutting measures as well as those that have already been introduced will have a positive impact on the results for this financial year. EGL remains financially sound.
Further information
Media Relations: Tel. +41 44 749 40 10, media.ch@egl.eu
Investor Relations: Tel. +41 44 749 41 01 and investor.ch@egl.eu
The 2009/10 EGL Annual Report is available here.
