Russia’s Gazprom offers price cut to Germany’s E.ON on gas supply

3/30/2016

By Christoph Steitz

FRANKFURT, March 30 (Reuters) -- Russia's Gazprom on Tuesday offered E.ON a price cut on its long-term gas supplies, ending years of unsuccessful talks and allowing the German utility to raise its outlook for the current year.

European gas firms such as E.ON are being squeezed as they buy gas under long-term deals with Gazprom linked to the price of oil while having to sell it to customers at lower retail prices linked to the freely traded spot market.

While plunging oil prices, down by nearly two-thirds since mid-2014, have eased the burden on utilities, Russian gas supplies still tend to fetch a premium over European hubs - a situation that buyers are keen to resolve given the pressure on earnings from competing renewables in their domestic markets.

The deal, which resolves arbitration proceedings between E.ON and Gazprom, will lead to a positive one-off effect of about 380 million euros ($425 million) on E.ON's core earnings (EBITDA) in the first quarter of 2016.

"With this agreement the prices are adjusted on the basis of our current market conditions," E.ON said in a statement on Tuesday, adding its generation and energy trading unit Uniper had derisked its long-term gas supply contracts for the upcoming years.

Germany, Europe's biggest gas market, is heavily reliant on supplies from Russia, which accounted for about 40% of German natural gas imports last year, while E.ON itself gets roughly a third of its gas needs from Gazprom.

As a result of the agreement, E.ON now expects EBITDA of between 6.4 billion euros and 6.9 billion euros this year, compared with a previous target range of 6.0 billion to 6.5 billion euros announced earlier this month.

Underlying net income, the source of E.ON's dividend, will reach between 1.5 billion and 1.9 billion euros, up from 1.2 billion to 1.6 billion.

Shares in E.ON turned positive on the news and closed up 0.3 percent.

E.ON has been active in Russia for decades, owning 9.9 gigawatts (GW) of electrical power-generating capacity and employing more than 5,000 staff in the country. The weak rouble led E.ON's core earnings in Russia to decline by 30% last year.

($1 = 0.8935 euros)

(Additional reporting by Oleg Vukmanovic in Milan and Vladimir Soldatkin in Moscow; Editing by Georgina Prodhan and David Evans)