UPDATE 2-E.ON agrees price cut with Gazprom, raises outlook

* E.ON now sees EBITDA of 6.4-6.9 bln euros in 2016

* Underlying net income now seen at 1.5-1.9 bln euros

* Shares turn positive

(Recasts, adds details, background)

By Christoph Steitz

FRANKFURT, March 29 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 percent 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 percent 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)

The article UPDATE 2-E.ON agrees price cut with Gazprom, raises outlook was originally published at Reuters - US Energy.