E.ON said it would prepare next year for the listing of the new company created by its breakup, with the spin-off taking place after its 2016 annual general meeting. The spin-off will not be accompanied by a job-cutting program, it said.
The company will hold a news conference about its plans at 1000 GMT on Monday.
In a first step, E.ON said it would transfer a majority of the new company's capital stock to its shareholders, avoiding the sale of new shares on the open market as is the case during an initial public offering (IPO).
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Instead, investors in E.ON will receive shares in the new company in addition to holding shares in the parent company, much in the same way that Bayer shareholders received shares in specialty chemicals unit Lanxess.
By choosing to spin off power generation, E.ON rids itself of a sector that has been hard hit by Germany's decision to boost renewables at the expense of gas and coal power plants.
The company also said it would post a substantial net loss for 2014 due to additional charges of about 4.5 billion euros ($5.6 billion) in the fourth quarter, citing its assets in southern Europe as well as loss-making power plants.
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E.ON said its supervisory board had approved a proposal to pay a dividend of 0.50 euro per share for 2014 and 2015, down from 0.60 euro paid for 2013.
E.ON said it had agreed to sell its businesses in Spain and Portugal to Australian energy infrastructure investor Macquarie for 2.5 billion euros, adding that it was considering selling its business in Italy.
The group also said it would conduct a strategic review of its exploration and production business in the North Sea.