EON AG (EOAN), Germany’s largest utility, raised its profit forecast after reaching an agreement on natural-gas prices with OAO Gazprom (GAZP), Russia’s export monopoly.
The deal will be backdated to the fourth quarter of 2010 and add about 1 billion euros ($1.25 billion) to EON’s half-year results, the utility said today in a statement.
EON, Gazprom’s largest European Union customer, has fought for more flexibility on its long-term contracts after losing hundreds of millions of euros from slowing demand and competition from spot sales of gas. Gazprom, which has raised prices under its long-term contracts following oil, is striving to keep more than 25 percent of the EU gas market.
“I didn’t expect an agreement so early, and I didn’t expect such an effect,” Hasim Senguel, an analyst at DZ Bank AG, said by phone from Frankfurt. “The question is which concessions EON had to make and how the new pricing mechanism works.”
EON shares rose as much as 3.8 percent to 17.875 euros, the highest intraday price since April 3, before erasing gains to close down 0.2 percent at 17.185 euros.
EON raised its full-year outlook for earnings before interest, taxes, depreciation and amortization by 800 million euros to a range of 10.4 billion euros to 11 billion euros, according to its statement. The forecast for underlying net income was increased by 1.8 billion euros to 4.1 billion euros to 4.5 billion euros as the company benefits from lower taxes and net interest expenses.
‘Stability for Decades’
“The basic structure of the long-term contract hasn’t changed,” said Christian Drepper, an EON spokesman. “Elements with an oil linkage are still in the contract but with a significantly reduced risk.”
Volumes weren’t revised and may even rise as the deal makes Gazprom’s gas more competitive, the Russian company’s export division said in an e-mailed statement. The changes mean “more stability for decades” and the agreement removes the need for legal proceedings, Gazprom Export said.
EON had turned to arbitration after more than a year of talks with Gazprom, as it found itself locked into paying oil- linked prices that rose to a level where the utility was selling gas to its own customers at a loss.
“This agreement represents a compromise and takes into account the current trends and developments of the natural-gas market,” Alexander Medvedev, a Gazprom deputy chief executive officer and head of the export division, said in the statement.
Medvedev said on June 29 that the deal would be “conceptually the same” as an earlier accord with Wingas GmbH, Gazprom’s joint venture with German explorer Wintershall AG.
Gazprom agreed this year to change pricing, granting a retroactive discount averaging as much as 10 percent for Wingas and customers, including GDF Suez (GSZ) SA and Eni SpA. (ENI) As of June, the Moscow-based company had agreed to return 20 billion rubles ($600 million) to customers under the discounts, most of which went to Eni, Gazprom Deputy CEO Elena Vasilieva said last week.
With the EON deal settled, Gazprom remains in arbitration and talks with Germany’s second-largest utility, RWE AG (RWE), over prices for its Czech unit, and Polskie Gornictwo Naftowe i Gazownictwo SA (PGN), known as PGNiG.
Gazprom plans to stick to the average discount as a benchmark and won’t increase the weighting of spot gas in EON’s contract, Medvedev said on June 20. A “small share” of the price will be linked to coal, he said at the time.
EON had asked suppliers to change contract pricing to as much as 100 percent indexation to the spot market, where prices had fallen amid oversupply, two people with knowledge of the matter said in February 2011.
The terms were an “acceptable result for both sides,” Klaus Schaefer, CEO of EON Ruhrgas, the natural-gas unit of EON, said in a statement issued with Gazprom. “By signing today’s agreements we are strengthening our long-standing, successful partnership with Gazprom.”
Gazprom and EON’s existing gas supply contracts run until 2036 and cover a total volume of as much as 600 billion cubic meters, according to the statement. EON Ruhrgas get about a quarter of its natural gas from Russia, while the rest comes from five other countries, EON said May 9.
“The high losses in EON’s gas business shouldn’t continue now,” Daniel Seidenspinner, an analyst at B. Metzler Seel Sohn & Co. KGaA, said by phone from Frankfurt.
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