Nov. 10 (Bloomberg) -- E.ON AG agreed to sell its German power network to Dutch electricity-grid operator Tennet BV for 1.1 billion euros ($1.7 billion) to help settle a three-year European Union probe into whether it thwarted competition.

The price is “good and fair” and higher estimates put on the value of the grid by analysts don’t reflect the investments needed or tighter regulation, E.ON Chief Executive Officer Wulf Bernotat said at a press conference today in Dusseldorf.

E.ON, Germany’s largest utility, said it has “almost completely fulfilled” its commitment to the European Commission after selling its transmission network on top of 4,800 megawatts of power generation capacity. Tennet wants to reap cost-savings from running two bordering grids and may be able to cut transmission rates on both sides, CEO Mel Kroon said.

Tennet expects the transfer of shares in the German high- voltage grid unit, called Transpower, to take effect from January 2010, according to Kroon. The Arnhem-based network operator will invest as much as 4 billion euros in the German infrastructure over the next 10 years, he said.

The German power grid unit has an agreed value of 885 million euros, E.ON said in a statement today. The purchase price for Transpower includes cash held by the company and the final sum will be set on Dec. 31. Both sides were in talks over the sale in September, three people familiar with the matter said at the time.

Analyst Estimates

Bernhard Jeggle, an analyst with Landesbank Baden Wuerttemberg who recommends investors buy E.ON shares, had estimated the grid to be worth 1.75 billion euros. DZ Bank AG analyst Mario Kristl valued the network at about 1.5 billion euros, according to a Nov. 9 note to clients.

Tennet obtained a loan from ING Groep NV and Royal Bank of Scotland Group Plc covering the purchase price. The company’s credit profile won’t be affected, according to documents handed to reporters at the press conference.

E.ON was advised by Deutsche Bank AG and Tennet by Royal Bank of Scotland. Freshfields Bruckhaus Deringer also acted as a legal adviser to E.ON.

E.ON has now raised about 6 billion euros selling energy assets to satisfy EU regulators and pay down debt amassed through acquisitions after the region’s energy market was opened up, Bernotat said. The utility aims to generate cash proceeds of more than 10 billion euros by the end of 2010.

North to South

E.ON’s high-voltage grid in Germany, which runs from north to south, consists of almost 11,000 kilometers (6,836 miles) of connections and 115 substations, Tennet said. The Tennet grid consists of more than 9,000 kilometers of electricity connections and 246 high-voltage substations in an area with a population of 16 million.

“This takeover will help to create a north-west European electricity market in which the Netherlands plays a leading role,” Maria van der Hoeven, the Dutch minister of economic affairs, said in a statement. “The integration is essential to assuring the security of supply.”

While Tennet is “open” to cooperating with other transmission system operators in the region, the company wants to keep its grid separate from power generation and supply operations, Kroon said, without being more specific.

The Dutch company, which wants to improve connections between its Dutch grid and the network it will acquire in Germany, doesn’t currently plan to build any more links between the two, the CEO said.

Tennet Spending

Tennet has spent a total of 776 million euros this year on buying the power networks of three Dutch utilities.

Last month, the Arnhem-based company said about 3 billion euros is needed to upgrade and expand the Dutch network in the next five to seven years. In May, it arranged credit facilities totaling 875 million euros with a group of seven banks for grid investments. Tennet’s projects include the installation of new 380-kilovolt connections in the west, east, north and southwest of the Netherlands.

E.ON is also selling and swapping power generation capacity, equivalent to around 20 percent of its installed base in Germany, to end the probe by the Commission, the EU’s regulatory arm.

The Commission began investigating E.ON in October 2006, and EU and German competition officials raided the Munich offices of its E.ON Energie unit two months later. By divesting assets to settle the probe, E.ON avoids a potential penalty of as much as 10 percent of annual sales for violating EU antitrust rules.

E.ON, whose net debt rose 18 percent to 47 billion euros in June from a year earlier, is also selling its natural-gas grid in Italy, while in Russia it’s swapping shares in gas producer OAO Gazprom for a holding in the Yuzhno-Russkoye gas field. In Sweden, E.ON has exchanged hydropower plants for nuclear drawing rights.

To contact the reporters on this story: Nicholas Comfort in Frankfurt at ncomfort1@bloomberg.netMartijn van der Starre in Amsterdam at vanderstarre@bloomberg.net

Last Updated: November 10, 2009 09:03 EST