March 10 (Bloomberg) -- E.ON AG, Europe's second-largest utility, said it expects a decline in 2004 profit as higher power revenue won't be enough to match last year's gains from the sale of stakes in companies such as Gelsenwasser AG.

Net income last year rose to 4.65 billion ($5.7 billion), or 7.11 euros a share, from 2.8 billion euros, or 4.26 euros a share, boosted by asset sales, Dusseldorf, Germany-based E.ON said at an earnings press conference. The company stuck to its target of increasing operating profit by 8 percent through 2006.

``Their outlooks are overly conservative, I had hoped for an increased target,'' said Karin Brinkmann, an analyst at HVB Group, who rates E.ON ``neutral.'' ``One reason for caution may be that last year was a very good year for Ruhrgas and E.ON has already hinted that it probably can't be repeated.''

Bernotat, 55, has sold stakes in German utilities that E.ON agreed to sell to win approval for its $12 billion acquisition of Ruhrgas AG, the largest importer of Russian gas in western Europe. Its expansion into the gas market and higher electricity prices will boost operating profit this year, E.ON predicted.

E.ON shares fell as much as 1.5 percent to 55.10 euros and were at 55.81 euros at 3:20 p.m. in Frankfurt. They have gained 23 percent in the past six months, compared with a 19 percent increase in the Bloomberg Europe Electric Index.

The utility plans to raise its 2003 dividend to 2 euros a share from 1.75 euros. E.ON has promised shareholders annual dividend growth of more than 10 percent on average through 2006.

Cost Cuts

Internal operating profit, or pretax earnings including interest expenses and excluding one-time items, increased to 4.57 billion euros from 3.8 billion euros. The forecast of 13 analysts surveyed by Bloomberg News amounted to 4.47 billion euros. Full- year sales rose 27 percent to 46.4 billion euros.

Fourth-quarter profit by that measure increased to 1.17 billion euros from 771 million euros. Profit after taxes amounted to 1.38 billion euros, compared with a loss of 70 million euros in the period. Profit after minorities from continued operations amounted to 1.25 billion euros from a loss of 192 million euros.

E.ON, which has sold and bought assets for more than 89 billion euros since 2000, is cutting 3,500 jobs to reduce costs and boost profit. The company in the past four years sold companies including metals trading, mobile phones and glass to buy utilities such as Ruhrgas and Powergen Plc in the U.K.

Ruhrgas Boost

Ruhrgas, which contributed to E.ON's earnings from February, had earnings before interest and taxes of 1.17 billion euros last year. Profit at the company's European gas business will probably fall this year, E.ON predicted. At Powergen, operating profit doubled to 905 million euros and E.ON forecast a ``clear'' increase in profit in the U.K. for this year.

Munich-based E.ON Energie boosted operating profit by a quarter to 3.8 billion euros. E.ON forecast rising profit in central Europe and Scandinavia at the unit for this year. In Germany, the introduction of a regulator may cut fees that competitors pay to use E.ON's networks, analysts including HVB's Brinkmann said. Power prices have rebounded and are on the same level as before the market opened to competition in 1998.

The company last year sold Gelsenwasser for 835 million euros and its stakes in regional gas distributors Bayerngas GmbH for an undisclosed price. It also shed VNG Verbundnetz Gas AG and regional utility EWE AG for 1.3 billion euros. This year, E.ON plans to decide how to sell its stake in real-estate company Viterra AG, the company's last big non-energy holding.

Russia, Eastern Europe

Since taking over in May, Bernotat bought Swedish energy company Graninge AB to boost E.ON's market share in the Nordic region and acquired Midlands Electricity Plc for 1.6 billion euros, doubling its U.K. power grid. E.ON in 2002 had bought the European customer base of U.S. utility TXU Corp.

E.ON said it will make a decision in coming months on whether to build a 500 million-euro gas-fired power plant and build up a gas supply business in Italy. In eastern Europe, the utility is interested in acquiring a gas company in Romania. E.ON has also held first talks on possible investments in the Russian gas production and power generation markets.

The utility stuck to its goal of raising operating profit to 6.7 billion euros in the next three years and targets net income of 3.4 billion euros for 2006. The return on capital employed should increase to at least 10.5 percent in the period, E.ON reiterated. Profit before earnings and taxes rose to 6.23 billion euros in 2003 from 4.65 billion euros a year earlier.

Debt amounted to 7.9 billion euros at the end of December and will probably be unchanged this year, E.ON said. Standard & Poor's rates the company's debt AA-, its fourth-highest ranking, with a negative outlook. Moody's Investors Service rates E.ON one step lower at A1, and last week said it may raise the rating because of the company's narrowed focus.

E.ON's 4.25 billion euros of 5.75 percent bonds due in 2009, yielded 3.5 percent, or 0.36 percentage point more than government debt of similar maturity. The risk premium, or spread, is unchanged from the beginning of the year.

To contact the reporter on this story: Nicole Weimer in Frankfurt at nweimer@bloomberg.net. Editor:

Last Updated: March 10, 2004 09:28 EST