German utility E.ON AG (EOAN.XE) said Wednesday that deteriorated trading conditions in the wake of the economic crisis have prompted it to lower its expectations for earnings contributions from southern European assets acquired two years ago.

The German energy giant also provided earnings guidance, saying it expects to report flat to stable earnings in 2010.

Duesseldorf-based E.ON said it would have to record impairment charges of EUR2.6 billion ($3.6 billion) due to deteriorated trading conditions for its businesses in Italy, Spain and France.

"The development of electricity and commodity prices is in some cases leading to significantly lower margins and capacity utilization," E.ON said.

E.ON said that the impairment charges will reduce its net profit, but won't affect adjusted earnings before interest and taxes or adjusted after-tax profit, which is the basis for annual dividend payments to shareholders.

It added that 2010 adjusted EBIT is still expected to come in flat to 3% higher on the year, while adjusted after-tax profit will be on the 2009 level.

The announcement initially sent E.ON shares around 2% lower in early trading Wednesday. At 0934 GMT the shares traded EUR0.12 or 0.5% higher at EUR22.50, outperforming a broadly softer market.

Around EUR1.5 billion in charges is related to the revaluation of assets--such as power plants--in Italy, Spain and France acquired from Italy's Enel Spa (ENEL.MI) and Spain's Acciona SA (ANA.MC) and Endesa SA (ELE.MC) in 2008.

A further EUR1.1 billion is related to goodwill on intangible assets such as personnel and cash reserves, E.ON said.

It's the second time that E.ON had to book impairment charges on its assets in Italy, Spain and France since acquiring them. In early 2009, the company booked around EUR1.8 billion in charges on assets in the three markets. At the time, however, the bulk of the charges was related to an increase in corporate taxes in Italy.

WestLB analyst Peter Wirtz, who rates E.ON shares as neutral, said that the key message of the renewed impairment charges is that E.ON overpaid for the assets in southern Europe in 2008.

E.ON acquired the Italy, Spain and France business for around EUR11.8 billion in 2008, including around 2.9 billion in debt. Deducting the overall impairment charges of around EUR4.4 billion would leave a book value of around EUR7.4 billion.However, the company's asset base grew in the past two years as it took into operation new power plants, which should increase somewhat the value of the Italy, Spain and France assets.

WestLB's Wirtz also said the lowered earnings expectations for southern Europe indicate that "E.ON won't make much progress in terms of earnings growth in coming years."

"Contrary to its intention the Italy, Spain and France assets won't help offset tougher regulation-related trading conditions on E.ON's home market Germany in the medium-term," he added.

E.ON will release third quarter earnings Nov. 10.

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