E.ON AG (EOAN.XE) Wednesday reported a 23% drop in first-quarter operating earnings, saying poor margins in its power generation and gas wholesale business took their toll on profitability.

The world's largest power and gas utility by revenue also lowered its 2011 profit guidance to reflect the recent EUR4.7 billion sale of its U.K. power network operator Central Networks to U.S. utility PPL Corp (PPL).

Chief Financial Officer Marcus Schenck said that the company expects its second and third quarter results will continue to show falling profits compared with the prior-year periods, before a return to year-on-year increases in the last three months of the year.

The main driver of the anticipated earnings growth in the fourth quarter is expected to be more favorable commercial terms for long-term oil-indexed gas procurement contracts, which have put margins in the gas wholesale business under enormous pressure since the end of last year, the company said.

E.ON, however, reiterated that the uncertainty surrounding the future of nuclear energy in its home market Germany makes forecasting 2011 earnings difficult.

"The impact of the economic crisis has reached our power business, and our gas business continues to be under margin pressure due to the disconnect between long-term, oil-indexed procurement prices and declining spot prices," said Chief Executive Johannes Teyssen in E.ON's first-quarter report.

The company said E.ON Ruhrgas--the backbone of its global gas business--continues to face considerable margin pressure, particularly in its wholesale segment where adjusted Ebitda declined by EUR756 million on the year to a loss of EUR296 million in the first quarter of the year.

It previously described the gas wholesale business as its "biggest operating risk" and pledged to push for adjustments of commercial terms of long-term supply contracts in talks with producers such as Russia 's Gazprom OAO (GAZP.RS).

For some gas procurement contracts E.ON has already achieved price reductions "that will shield us from losses on gas supply contracts that are equal to about one quarter of our procurement volume," CFO Schenck said.

Asked to quantify the expected financial benefit of the renegotiated terms of the deals, he said the agreements should result in a "high two-figure million euro amount" per quarter.

Looking ahead, E.ON said it expects 2011 adjusted earnings before interest, taxes, depreciation and amortization, or Ebitda, to decline to between EUR10.7 billion and EUR11.4 billion.

It previously forecast adjusted Ebitda to come in between EUR11.2 billion and EUR11.9 billion.

Earlier this month it warned shareholders it may have to cut its profit forecast due to a drastic shift of Germany's atomic energy policy, with the country's seven oldest rectors shut down during a three-month safety review after the nuclear accidents in Japan. Two of the reactors affected by the forced outages are operated by E.ON.

The company Wednesday said that its current profit forecast is based on the assumption that its nuclear power stations can resume electricity production after the German moratorium.

The three-month outage of its Isar 1 and Unterweser reactors is expected to reduce 2011 earnings by around EUR250 million, E.ON reiterated. It said, however, that part of the nuclear moratorium burden should be offset by higher power prices.

In the first three months of the year, net profit was EUR2.27 billion, almost unchanged from EUR2.28 billion in the same period last year. The figure exceeded the EUR1.5 billion average forecast of 12 analysts polled by Dow Jones Newswires.

Adjusted Ebitda fell around 23% to EUR3.47 billion compared with EUR4.49 billion a year earlier. Analysts had expected EUR3.55 billion.

Revenue in the January to March period was EUR27.85 billion, up 8% from EUR25.68 billion a year earlier. Analysts had forecast revenue of EUR25.67 billion.

At 1513 GMT E.ON shares were trading up EUR0.19, or 0.9%, at EUR21.48, in a broadly softer market.

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