RWE AG expects a 40-year-old system for setting European gas prices that has cost Germany’s second-largest utility hundreds of millions of euros to be cast aside after an arbitration ruling against Russia’s OAO Gazprom.
A Vienna tribunal decided RWE paid Gazprom too much from May 2010 and the Moscow-based gas-export monopoly needed to introduce market rates for the fuel, according to the German power producer. In reaction, Russian President Vladimir Putin defended the decades-old regime of linking rates to oil indexes.
“We have a solution which partly replaces oil indexation by gas indexation,” said RWE Chief Financial Officer Bernhard Guenther in an interview at the company’s head office in Essen. “Going forward we will claw the small money back which we might now still lose on the remaining oil-indexed part.”
RWE, now in price talks with Gazprom, has fought to end the tradition of linking supply deals to oil prices that was set up before European gas markets for immediate delivery developed. Weakening demand for gas means the amount utilities can charge customers for the fuel has sunk relative to Gazprom’s prices.
The ruling “will be taken into consideration in the new talks,” Guenther said. Seeking arbitration, instead of settling with Gazprom like larger rival EON SE, was successful, he said. RWE was the only European customer to complete arbitration.
RWE has declined by 9 percent in Frankfurt trading since announcing the ruling June 27, while EON is down 1.1 percent. RWE today advanced 0.6 percent to 22.39 euros by the close.
The ruling brought “quite limited” links to gas indexes, Gazprom Export, responsible for contracts, said in a statement. “We consider the ruling objective, weighted and taking into account principles of long-term contracts, arguments from both sides and objective processes that happened on the market.”
EON, Gazprom’s biggest European customer, reached a deal with the Russian company on gas prices a year ago that added about 1 billion euros ($1.3 billion) to half-year results. RWE said on July 1 the effect of the arbitration ruling was “in line” with its expectations, without providing a figure. The company will get a similar windfall to EON, Spiegel reported.
“The award was a necessary step to eliminate the anachronism of oil-price indexation,” said Thomas Deser, a portfolio manager at Union Investment GmbH who is responsible for the fund’s 57 million-euro stake in RWE. The company may have avoided raising its outlook after the ruling because of possible losses in Egypt operations, he said.
RWE plans to sell its Dea oil and gas production unit in the country to raise as much as 5 billion euros, according to a person familiar with the matter who asked not to be identified.
The utility is also studying mothballing power plants where losses are higher than the cost of closing them, Guenther said.
RWE is cutting capital and operating expenditure to ensure it can generate cash and plans to reduce the ratio of net debt to earnings before interest, tax, depreciation and amortization in the medium term to 3 from 3.5, he said. It won’t likely pay down debt without disposals until 2015, when it can generate cash after paying expenses and dividends, Guenther said.
In March, RWE abandoned a target of 7 billion euros of disposals by the end of the year as asset prices were too low.
RWE’s shares, down 28 percent this year, have been “driven by the developments in power generation,” Guenther said. It’s a “kind of seismic shift from the old business model.”