UPDATE 2-Hungary signs preliminary deal to buy E.ON gas units

Fri Nov 30, 2012 8:50pm IST

Stocks

   

* State-owned MVM to buy E.ON's gas units by end-Jan

* No price given for gas trade and storage units

* Deal seen giving govt control over Russian gas contract

* Gas prices a touchy political issue, elections due in 2014 (Adds more detail, prime minister, analyst comments)

By Krisztina Than

BUDAPEST, Nov 30 (Reuters) - Hungary has agreed to buy the local gas units of Germany's E.ON AG and hopes to use its ownership to gain greater control over politically-sensitive energy prices.

Hungary gets over 80 percent of its annual gas needs of between 11 and 12 billion cubic metres through imports, mostly from Russia, former Communist overlord of the European Union member state.

Under the agreement, which the two sides hope to finalise by the end of January, Hungary's state-owned energy firm MVM, which the government wants to beef up into a key regional energy player, would buy E.ON's local gas trade and storage units.

"Hungary aims to create stable energy supply in a sustainable way and is therefore interested in expanding its activity via (the) state-held MVM group," the government said.

A "declaration of intent" on the deal was signed by Prime Minister Viktor Orban and E.ON Chief Executive Johannes Teyssen.

Terms of the proposed deal, which would give the government control over vital gas imports and negotiations with key Russian supplier Gazprom, were not disclosed.

Local media reports have said MVM was likely to pay closer to 800 million euros for the units than the 1.2 billion figure earlier quoted in the media as the price sought by E.ON.

Orban, whose centre-right government has boosted state ownership in several industries since it took power in 2010, first signalled in August that his government would seek to buy E.ON's local gas units.

Orban, whose support has suffered from domestic austerity and high unemployment, has also said he wanted to transform household energy distribution into a non-profit activity.

NO PRICE RISES

"I can only reiterate, not only will there be no gas price rises or utility price rises, but rather, I will try my utmost so that we can curb utility costs in the coming year," Orban told public radio on Friday.

"Those making profits in the utility sector will have to make do with lower profits," said Orban, who faces an election in 2014. "Their taxes will rise, while the people will have more money left."

Earlier this month his government said it would raise tax on energy utilities to 50 percent next year, one of the highest such rates in the world, though utilities would be able to reduce that via investments.

E.ON's gas wholesale unit E.ON Foldgaz Trade Zrt is Hungary's biggest gas trader. Its storage unit E.ON Foldgaz Storage Zrt operates four gas storage facilities, with a total capacity of 4.2 billion cubic metres, according to its website.

The price of natural gas has long been a hot political issue in Hungary, whose import deal with Gazprom expires in 2015.

Backed by the state, MVM could have better bargaining chips to offer in a future gas deal with Russia. The company is also building a gas interconnector to Hungary's northern neighbour Slovakia, to be completed by 2014.

"The government expects it could have better positions in negotiating with the Russians (than E.ON)," said Concorde analyst Attila Vago. "This transaction is also a step towards putting the state in a position where it can influence market prices and sales conditions in a sustained way."

Erste Bank analyst Jozsef Miro said any losses that may occur due a difference between import and domestic consumer prices will now be incurred by MVM, which, however, could mitigate that impact from its profitable operations.

($1 = 215.36 Hungarian forints) (Additional reporting by Sandor Peto; Writing by Gergely Szakacs; Editing by Mark Potter and David Holmes)

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