RWE AG (RWE.XE) Thursday raised its medium-term earnings outlook brushing off concerns about falling energy demand in the recession and said it expects stable earnings in 2009 on the same day it reported a 4.1% drop in 2008 net profit.

Through 2012, Essen-based RWE now expects operating profit to rise between 5% to 10% on average per year while recurrent net profit is expected to increase 10% per year on average in the same period.

Germany's largest power producer by output had previously targeted operating profit to rise 5% on average per year and increases of 5% to 10% for recurrent net profit.

RWE, however, said the new medium-term earnings targets are dependent on the recession not having a "long-lasting negative impact on wholesale electricity prices."

"In view of the substantial fluctuations in wholesale electricity prices, the company is basing its forecast on the expectations of an average realized German electricity price of at least EUR60 per megawatt-hour during this period," RWE said.

Analysts welcomed the company's raised medium-term profit targets, but some questioned the company's power price assumption in light of the current price situation.

"We appreciate RWE's effort to instil confidence by raising guidance but with forward 2012 power prices at 48.80/MWh versus its assumption of 60/MWh this per se will not have a great impact on the share price we believe," said Citigroup analyst Alberto Ponti, who rates RWE as buy.

RWE Chief Executive Juergen Grossmann, however, said the company expects power prices will rise from the current low levels.

He added that the fundamental factors that have driven energy prices in the past few years will quickly gain importance again.

The factors include growth of the global population, increasing competition for fewer energy sources as well as inadequate investment in upstream oil and gas and the construction of new power plants, which will result in increasingly tight supply.

At 1426 GMT RWE shares traded down EUR0.86, or 1.6% lower, at EUR51.77 in a broadly higher market.

RWE also said its previously announced cost cutting and efficiency improvement program over EUR1.2 billion through 2012 will help achieve the targeted earnings increases.

In 2009 the company expects the measures will contribute around EUR450 million in earnings.

The planned EUR8.24 billion takeover of Dutch utility Essent NV that was announced last month isn't yet reflected in the new medium-term targets, RWE added.

Germany's second-largest utility by market value behind E.ON AG (EOAN.XE) also said it still intends to invest an average of around EUR6.5 billion per year between 2008 through 2012, amounting to more than EUR30 billion.

RWE said net profit in the year ended Dec. 31 fell to EUR2.56 billion from EUR2.67 billion a year ago, just missing the EUR2.64 billion average estimate of 17 analysts polled by Dow Jones Newswires.

Excluding non-recurrent items, including EUR600 million impairment charge related to the initial public offering of RWE's U.S.-based water unit American Water Works Co (AWK) in early 2008, net profit rose 12.8% to EUR3.37 billion - more or less in line with the EUR3.44 billion analysts had forecast.

The company didn't immediately publish fourth-quarter figures, but a Dow Jones Newswires calculation showed that net profit in the three months to Dec. 31 swung to a net profit of EUR347 million compared with a loss of EUR167 million in the same period last year.

Sales rose more than 15% - driven mainly by higher average power prices than a year earlier - to EUR48.95 billion from EUR42.51 billion, while analysts forecast EUR47.29 billion.

Company Web site: www.rwe.com

-By Jan Hromadko, Dow Jones Newswires; +49 69 29 725 503; jan.hromadko@dowjones.com