E.ON: We’re Russia’s biggest investor - interview

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Experts estimate that the German concern E.ON holds gas and electricity assets in Russia worth $25-26 billion. It plans to expand its presence in those sectors as well. The concern still does not have an agreement with Gazprom on an asset exchange for the Yuzhno-Russkoe deposit in the Yamal-Nenets Autonomous Area. E.ON chairman of the board Wulf Bernotat, in his first interview with the Russian press in two years, talks about the companies main Russian projects.

What is your company’s strategy in Russia? What are your goals and the deadlines you have set for them?

Our strategy is based on long-term partnership relations with Russian companies, especially Gazprom, planned for more than 30 years. About two years ago, we made a decision to enter the electricity sector, which has been successful. About 70% of the stock in OGK-4 (Wholesale Generating Co.4) has been acquired. And I emphasize that it was not a spontaneous step arising from a sudden desire to enter the Russian electricity market. Rather, it was the logical conclusion of long-term relations that existed in the sphere of natural gas. We own 6.5% of the stock in Gazprom, our interests are represented on the board of directors of the Russian gas monopoly and we are the largest importer of Russian gas. If the value of our shareholders equity packages in Gazprom and OGK-4 were added up [the capitalization of 6.43% of Gazprom stock was $19 billion as of November 5], as well as the share we plan to acquire in the Yuzhno-Russkoe deposit, we are the largest foreign investor in Russia. Deadlines are meaningless, because we plan to invest logically and gradually as the business develops. The development of our relations can be seen in the fact that we own a quarter of Nord Stream AG, which is building the North European gas pipeline.

E.ON’s electricity business is developing most successfully. What are your long-term plans for OGK-4. What will you do with that asset?

We plan to increase our share in OGK-4 and will make the appropriate offers to the company’s minority shareholders. The 23% of shares in OGK-4 that RAO UES of Russia owns will be distributed among the minority shareholders in connection with its dissolution in 2008. But the 70% that we already own allows us to manage the company successfully. Our task at the moment is to integrate that company smoothly into our concern. That is a matter of setting up a team of representatives of E.ON and OGK-4 that will prepare for the annual account taking, since we want to include data from OGK-4 in the E.ON annual report. Last week, we had the first meeting with the management and employees of OGK-4 and we acquainted them with our plans.

Do you intend to replace OGK-4 executives?

In the long term, we will have a team of managers in which Germans and Russians work together. We take that approach no only in Russia, but in all countries where we have assets, whether it is Great Britain, Scandinavia, Italy or Spain. We have always decided what positions local workers can be kept in and in what positions representatives of our concern would be especially strong in. But every time it was a mix.

Will you replace the general director and the deputy director for finance?

We have delegated a number of the top executives of our concern to speed up integration. A decision on replacing managers in key positions has to be made much later.

E.ON had set its sights on Mosenergo as part of an exchange of electricity assets with Gazprom. Have you reconsidered or are you still counting on receiving a share in that company?

I will be happy to elucidate that situation, since a direct exchange of electricity assets involving Mosenergo was never in our plans. Four years ago, we discussed questions connected with our cooperation on the Russian electricity market with [Gazprom CEO] Alexey Miller. It was assumed that Gazprom would participate in it because of the positions it has here and we would bring our experience and know-how to it, which are useful to Gazprom when entering new market. Nothing came of it in the end, however, because Gazprom decided to act without us and we turned our attention to other objects, particularly OGK-4.

Are there other electricity assets in Russia that interest E.ON? How soon do you intend to acquire or build them? Are you interested exclusively in gas generation, or are you interested in coal generation and hydro-generation as well?

At this stage, we are most interested in issues of integration of OGK-4, which has 5500 employees and facilities throughout the country. The distance between the farthest electric plants is 4000 km. Since there are electric plants in OGK-4 that run on gas, as well as coal, it fits E.ON’s development strategy well. Parallel to the process of integration, we plan to make investments to increase capacity, in order to meet the demand for electricity. There is no time to wait. Our total expenses for the purchase of OGK-4 were $5.7 billion, of which $1.8 billion will go to increase the authorized capital, which will be used to finance the projected new capacity. We think that OGK-4 is an excellent platform for the expansion of capacity. As for other assets, we will turn our attention to them when the time is right. No final decision has been made yet and we will consider it by analyzing the conditions of specific objects. I cannot answer your question at the moment yes or no, and all the more so since we are competing with other companies and should not reveal our plans to them.

So we can expect you to buy another share in a territorial generating company at any time?

We will attentively analyze the appropriate objects before making a decision on their acquisition.

What does your cooperation with Gazprom in the area of electricity consist of? At one time, you refused to allow the Russian gas monopoly access to E.ON electricity assets in Germany. Are you afraid that the Russians will practice dumping on your domestic market?

Nothing of the sort. We never blocked Gazprom’s access to the German electricity market. We always conducted negotiations about it, including on the exchange of assets. The negotiations came down to a discussion of the Hungarian assets E.ON acquired from MOL during privatization, also in the electricity sphere. Some time later, however, Gazprom decided to concentrate on gas-powered electricity plants in Western Europe. Therefore, now we are talking about a share gas plants E.ON has in Europe, including in Germany, and about the joint construction of new plants.

Did Gazprom reject the Hungarian assets completely?

I can’t talk about the details of the negotiations until we reach an agreement with Gazprom, but its interests shifted in the direction of gas-powered electric plants in the EU.

Is E.ON prepared to provide Gazprom a share in its British electric plant? Would it be a blocking package or a controlling package?

Gazprom is interested in shares in the electric plant in Britain, but not in our E.ON UK subsidiary. Now is not the time to discuss the details in the press, since they are still in the active stage.

The deadline for completing talks on the development of the Yuzhno-Russkoe deposit has been extended more than once and now a new deadline has been announced – the end of November. What has prevented you from reaching an agreement on Gazprom’s conditions for two years?

Most of all, it has to be said that Gazprom itself, for a number of reasons, asked for the deadlines to be moved. And [Gazprom deputy chairman] Alexander Medvedev said that was working on a number of projects at the same time and negotiating with BP and Shell and there was no chance to hold final negotiations on Yuzhno-Russkoe. Today we should divide the issues into two blocks. That is the package of assets, and here an agreement had more or less been reached, and the assessment of the share in Yuzhno-Russkoe. There is not yet an agreement on that block, but I can suggest how we will reach it.

The Russian press has stated that the cost of the assets in the deal between Gazprom and BASF, which has a share in Yuzhno-Russkoe that is analogical to yours, is $1.3 billion. Please comment on that sum.

I don’t know how accurately the package was assessed, but they used a different formula for asset estimation. As far as I understand it, it was a matter of the companies’ joint activities in Libya. There the logic is completely understandable. The price of gas rises along with the price of oil, and that influences the market assessment of assets and, in this case, the package has no primary importance. We have a formula for the exchange of assets that assumes a difference between the cost of the assets in one sector, gas, for instance, where prices rise or fall along with prices on world markets, and the cost of gas-powered electricity generation. That complicates assessment.

Last year, $800 million was mentioned in the press as the total value of the exchange b between Gazprom and E.ON. Do I recall correctly that you provided a share in the electric plants in Great Britain or Italy for exchange with additional cash payment?

Yes. From the very beginning, we proposed a large part of the payment in assets ad the rest in money. Nothing has changed in that issue.

When will the negotiations be completed and whose court is the ball in now?

The ball is now in the center of the field. There is no sense in naming a new date every two weeks. The negotiations will be completed the moment when the agreement is signed.

Talk, please, about how the Nord Stream project is going. What is the main source of disagreement between the participants in the project?

There is a shareholders board that decides principle issues connected with the company’s activities. Managers decide technical issues. We are maintaining the planned schedule. There are no disputed points among the partners.

Has financing been found for Nord Stream? How much does it cost – €5 billion or $12 billion? How much is planned in the E.ON budget for it?

I am completely unfamiliar with the figure of $12 billion. I operate on the sum of expenses of €5 billion for the two lines of the gas pipeline. If the need arises to raise expenses, the shareholders will consider it. We definitely envisaged a certain sum in our budget in case of unforeseen expenses.

Comment, please, on the EU initiative to liberalize the gas market that would divide the business into transport and sales to the final consumer.

We have repeatedly stated from the podium of the EU and to individual commissioners that we do not consider the division between production and transport companies the right move and that implementation of that initiative will not lead to increased competition or decreased energy prices. I know that BASF, Total and Gazprom will oppose those initiatives. But each of them is formulating its position separately.

What advantage does your concern have over other strategic investors in Russia on the gas and electricity market? Should we expect E.ON projects in other spheres of business?

We will continue to concentrate our efforts on the production and sale of natural gas and electricity, and on renewable energy sources that will eventually also be usable to produce electric power. Our advantage in comparison with other strategic investors is that we are present on practically all the energy markets of Europe, from Russia to Turkey. That gives us an advantage in the growing tendency to establish a single European energy market. We support that idea and support not so much the elimination of borders in the EU energy market as the improvement of physical connections between individual parts of that single market. In my view, that is the strategic advantage of E.ON. (kommersant)

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