E.On’s acquisition of Ruhrgas – a study of competition issues and

regulatory concessions

© Utility Consultants Ltd 2003

Prepared by Utility Consultants Ltd

www.utilityconsultants.co.nz

Disclaimer

This research report is of a generalnature, and is not intended as specific

professional advice. Accordingly, neitherUtility Consultants, nor its’ directors andshareholders, shall be liable for any lossor damage arising from action or inaction

based on this research report.

Contents

Disclaimer

Contents

Introduction

Overviewof the deal

Acquiringthe stakes

Approvalprocess

Objections

Regulatoryconcessions

Acknowledgments

Feedback

Contact us

Introduction

E.On’s recent acquisitionof Ruhrgas AG for a finalprice of €10.2b marked anew era in global energy

acquisitions

This stands apart asone of the biggest deals

yet, and is likely to heralda new era of investments

characterised by theirsize

This report analysesthe regulatory approvalprocess, the objections

and the concessions thatwere extracted from E.On

Overview ofthe deal

Issues to bediscussed

E.On’sstrategy

Overviewof Ruhrgas

Overviewof E.On

Ruhrgas’ fitwith E.On’s

strategy

The fit withGermany’s

energy policy

Overviewof E.On

Annual electricitysales of about318,000 GWh

Third largestutility in Europe

Formed from themerger of VEBAand VIAG in 1999

Revenueabout €80b

for 2001 year

EBITDAabout €8.6b

for 2001 year

Overviewof E.On

Cash reservesthought to beabout €30b

Energy & oilrepresents about57% of revenue

Recentlydivested Degussa

(chemicals)

Already has manyacquisitions inEurope and UK

Listed on theFrankfurt & NY

stock exchanges

Overviewof Ruhrgas

Has about a60% share of theGerman market

Annualrevenue€11.8b

Primarily awholesaler selling

50b m3 per year

Assets include11,000 km of

pipelines

35% of gas comesfrom Russia, 25%

from Norway

Overviewof Ruhrgas

Expects toinvest €1b in new

gas pipelines

Expects toincrease thisstake to 8%

Owns about6% of Gazprom(at March 2003)

Subsidiary VNGhas a 70% share of

east German market

Shift to gas asprimary fuel will

drive growth

E.On’sstrategy

Dispose ofnon-utility

businesses

Strengthen positionthrough accretive

acquisitions

Focus oncore energy

business

Emphasison continualcost-cutting

Continuedre-structuring tomaintain focusand alignment

Ruhrgas’fit with E.On’s

strategy

Many synergiesfrom parallel value

chains

Increasing shift togas will provideincreased sales

Solid fit with coreenergy business

Stake in Gazpromfits well with E.On’s

push eastwards

Acquired marketshave high revenue

densities

Fit withGermany’s

energy policy

Need for futureinfrastructure

investment

Need to secureGermany’s gas

imports

Acquiringthe stakes

E.On’s Initial 38.5% stakein Ruhrgas was acquiredfrom several companiesincluding Vodafone and

Gelsenberg

E.On acquired afurther 40% stake fromShell, Exxon-Mobil and

Preussag

Final 20% stake wasacquired from RAG

coincident with the saleof Degussa to RAG

Approvalprocess

Key stages inthe approval

Initial applicationto Federal Cartel

Office

Appeal to theEconomics

Ministry

Court injunction(followed by out ofcourt settlements)

Initial application to the Federal Cartel Officefor approval to acquire 100% of Ruhrgas AG

Rejection of this application on the basisthat E.On would increase its already dominant

position in the German gas marketJan 02

E.On appeals this rejection to the EconomicsMinistry, seeking an exemption on the basisthat the benefits to the German economy out

weight the loss of competition

Economics Ministry over-turns the FederalCartel Offices’ initial rejection

Jul 02

Several objectors to the proposed deal weresuccessful in obtaining an injunction from the

Düsseldorf court on the basis of proceduralerrors in the Economics Ministry’s over

turning of the Cartel Offices’ initial rejection

Economics Ministry conducts a secondinvestigation that corrected the alleged

procedural errors and confirmed its’ previousover-turning of the Cartel Offices’ rejection,

but with additional concessions

Sep 02

Aug 02

Düsseldorf court maintained its injunctionuntil its’ final decision was expected in late

January 2003 (later confirmed as 31st)Dec 02

Court decision waswidely expected to uphold previous rulings

blocking the EconomicsMinistry’s clearance

on the basis of marketdominance rather than

procedural error

E.On begins negotiations with the 9plaintiffs to obtain out-of-court agreement

on suitable concessions

Plaintiffs withdraw objections beforeDüsseldorf court case begins as suitable

out of court agreements are reached

Jan 03

Key risk of the court casewas that it could be

referred to the EU who wouldbe in a difficult situation ofneeding to appear to not

simply be following a lowercourt, but also to not totally

ignore the findings of a lowercourt. Referral to the EUcould also have allowed

OFGEM to object

E.On also had the option ofappealing the Düsseldorf

court’s ruling to the GermanSupreme Court, but this could

have delayed proceedingsuntil the end of 2004

Further issue that RAG’s€38 per share bid for

Degussa would lapse on31/1/3 unless the court ruled

in E.On’s favor on theRuhrgas acquisition

Objections

9 objectors

EnBW

Trianel

StadtwerkeRosenheim

StadtwerkeAachen

GGEW

Fortum

Ampere

ConcordPower

Ares Energie

Had the Düsseldorf courtcase proceeded and thenbeen referred to the EU,

OFGEM may also have beenable to object on the basis ofreduced competition of gas

supply to the UK

Company Basis of objection to Ruhrgas acquisition

AmpereConcerned that a reduced number of suppliers could adversely effect their broking activities.

Ares EnergieConcern that an enlarged E.On would make it difficult for Ares Energie to grow its share of the German market.

Concord PowerCould result in unfavorable gas supply conditions to a planned power station in Lubmin (in the north-east).

EnBWPossible concerns that in a vertically integrated E.On, the Ruhrgas component would favor E.On to EnBW’s detriment. May also have been concerned about a reduction in the number of wholesalers.

FortumConcern that an enlarged E.On would make it difficult for Fortum to grow its share of the German market.

GGEWPossible concerns that in a vertically integrated E.On, the Ruhrgas component would favor E.On to GGEW’s detriment. May also have been concerned about a reduction in the number of wholesalers.

Stadtwerke AachenPossible concerns that in a vertically integrated E.On, the Ruhrgas component would favor E.On to Stadtwerke’s detriment. May also have been concerned about a reduction in the number of wholesalers.

Stadtwerke RosenheimPossible concerns that in a vertically integrated E.On, the Ruhrgas component would favor E.On to Stadtwerke’s detriment. May also have been concerned about a reduction in the number of wholesalers.

TrianelConcerned that a reduced number of suppliers could adversely effect their broking activities.

Regulatoryconcessions

Key classes ofconcessions

Divestbusinesses

Auction gasallocations

Grant favorablesupply conditionsto divested firms

Commit toinvestment

program

Economics Ministry viewed this as essential, but it was not included in

the final concessions

Divestbusinesses

Stake inBayerngas

Stake inStadtwerke

Bremen

(Ruhrgas)Stake in VNG

Stake in EWE(Oldenberg)

Stake inGelsenwasser

Stake inThuega

Many of the plaintiffs wanted this concession included but

in the end it was excluded

An additional criteriaimposed was that the

divested businesses mustbe sold to viable entities to

ensure that they providereal competition to E.On

Auction gasallocations

Auctions to be inOctober 2003, 2004

2005 and 2006

Auction 200bkWh of gas tocompetitors

Two auctionsto occur at the

Emden/Bunde hub

Two auctionsto occur at theWaidhaus hub

Grant favorablesupply conditions

Companies that buy more than 50%of their gas from E.On or Ruhrgas havethe right to re-negotiate their contracts,

including reducing their contractedconsumption by up to 20%

Acknowledgements

Utility Consultants Ltdacknowledges the helpof the following peoplein compiling this report

Gill Griffith-Jones,Reuters

A kind lady whowished to stay

anonymous

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