E.ON's $ 3 bn gas plan threatened by Hungarian regulators

Dec 20, 2004 01:00 AM

Hungary's energy regulator may block plans by E.ON, Europe's largest utility, to buy the gas business of MOL for $ 2.8 bn and use it as a hub to ship Russian natural gas from Gazprom throughout Europe.
A regulatory dispute could force E.ON to rethink its strategy of selling Russian gas to western Europe and the Balkans. E.ON wants to expand the reach of its gas unit, which it paid $ 12 bn for last year.

Hungary's Energy Office said it was concerned E.ON would gain too much control of the country's gas market, with holdings in importing, storage, transportation, wholesale and retail businesses. The company's influence in throughout the gas business may distort the market and deter competition, the regulator said.
"We won't support the sale of stakes of a certain size to the same owner," Gabor Szorenyi, the head of the regulator's consumer protection department, said. "We will set some very tough conditions in any case. We would like to avoid a company involved in retail to have influence in transport and grid operation as well."

It's too early to say what action the regulators might take, Szorenyi said. The Energy Office has a range of sanctions available, among them forcing E.ON, which is based in Duesseldorf, Germany, to sell some of its Hungarian assets.
E.ON agreed Nov. 4 to pay EUR 425 mm and assume EUR 350 mm of debt to buy 75 % of MOL's storage and wholesale businesses and 50 % of a joint venture with Gazprom that buys Russian natural gas. Budapest-based MOL also has an option to sell 75 % of its gas-transport business, worth EUR 1.25 bn, and its remaining stakes in the various units.

Regional plans
E.ON said it wants to invest more in gas storage in Hungary and other countries in the region to sell more natural gas to neighbouring Serbia and other Balkan countries. It expects demand to rise in eastern Europe, where economies are grow faster than they are in the west.
"Hungary's role could increase for delivering to Southeast Europe," Burckhard Bergmann, head of E.ON's gas unit, said earlier. "The gas markets of the neighbouring countries are in a continuous growth process." E.ON bought a Romanian gas distributor in October for EUR 304 mm. It has two gas distributors in Hungary and four gas suppliers in the Czech Republic, and it wants to boost its stakes in the Hungarian retailers.

No decision yet
Another Hungarian regulator, the competition office has suspended its decision, waiting for the outcome of the MOL purchase, Marta Nagy, vice president of Hungary's competition office, said. The purchases would increase the company's share of Hungary's retail market to 37 % from 30 %.
"They are not allowed to exercise their controlling interests," Nagy said. Her office has not yet received a request from the companies, she added.

E.ON and MOL haven't notified the energy office of the sale, either, according to Szorenyi. They haven't been in contact with the regulator, except for one visit by an E.ON executive to Ferenc Horvath, the office's president, he said.
The German company will have to show that it can effectively separate the operations in the different parts of its business, Szorenyi said. The regulator, which would prefer to leave its market available for further competition, sent its conditions to MOL before the sale, he said.

Gazprom's role
Gazprom, 6.4 % owned by E.ON, supplies about 80 % of Hungary's gas consumption, most of its imports. The company said it may buy stakes in the former MOL units, which may further deter competition, said analysts such as Tamas Pletser of Erste Bank.
"This has to be regulated properly; this is a virtual monopoly," said Pletser "The E.ON-Gazprom group would be able to permanently set a higher price." Even if the regulator voices concerns, the companies probably will find a way around them, Pletser said. The acquisition is key to E.ON's strategy and is crucial for MOL, as it looks to raise funds for oil industry acquisitions and rid itself of political risk.

MOL surges
MOL's value more than doubled this year, to $ 7.4 bn at the closing price of 12,690 forints a share, in part because the company sold the gas unit. MOL lost more than $ 1 bn from 1998 to 2002 selling gas, because the government forced it to sell the fuel for less than the import price.
"This extra would go out of the (share) price if a period of uncertainty were to start," said Istvan Horvath, who helps manage the equivalent of $ 650 mm in Hungarian assets, including MOL stock, at the Budapest unit of KBC Bancassurance. "If the deal would be scrapped, that could take several thousand forints off the price." MOL plans to use the proceeds to buy oil and gas fields. It sold the stakes after Hungary partly opened its gas market and introduced a new pricing system for imports, helping the gas unit return to profit.

Source: Bloomberg
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