1. 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

2. Disclaimer

3. This research report is of a general nature, and is not intended as specific professional advice. Accordingly, neither Utility Consultants, nor its’ directors and shareholders, shall be liable for any loss or damage arising from action or inaction based on this research report.

4. Contents

5. Disclaimer Contents Introduction Overview of the deal Acquiring the stakes Approval process Objections Regulatory concessions Acknowledgments Feedback Contact us

6. Introduction

7. E.On’sE.On’s recent acquisition of Ruhrgas AG for a finalRuhrgas AG price of €10.2b marked a new era in global energy acquisitions This stands apart as one of the biggest deals yet, and is likely to herald a new era of investments characterised by their size This report analyses the regulatory approval process, the objections and the concessions that were extracted from E.On

8. Overview of the deal

9. Issues to be discussed E.On’s strategy Overview of Ruhrgas Overview of E.On Ruhrgas’ fit with E.On’s strategy The fit with Germany’s energy policy

10. Overview of E.On Annual electricity sales of about 318,000 GWh Third largest utility in Europe Formed from the merger of VEBA and VIAG in 1999 Revenue about €80b for 2001 year EBITDA about €8.6b for 2001 year

11. Overview of E.On Cash reserves thought to be about €30b Energy & oil represents about 57% of revenue Recently divested DegussaDegussa (chemicals) Already has many acquisitions in Europe and UK Listed on the Frankfurt & NY stock exchanges

12. Overview of Ruhrgas Has about a 60% share of the German market Annual revenue €11.8b Primarily a wholesaler selling 50b m 3 per year Assets include 11,000 km of pipelines 35% of gas comes from Russia, 25% from Norway

13. Overview of Ruhrgas Expects to invest €1b in new gas pipelines Expects to increase this stake to 8% Owns about 6% of GazpromGazprom (at March 2003) Subsidiary VNG has a 70% share of east German market Shift to gas as primary fuel will drive growth

14. E.On’s strategy Dispose of non-utility businesses Strengthen position through accretive acquisitions Focus on core energy business Emphasis on continual cost-cutting Continued re-structuring to maintain focus and alignment

15. Ruhrgas’ fit with E.On’s strategy Many synergies from parallel value chains Increasing shift to gas will provide increased sales Solid fit with core energy business Stake in Gazprom fits well with E.On’s push eastwards Acquired markets have high revenue densities

16. Fit with Germany’s energy policy Need for future infrastructure investment Need to secure Germany’s gas imports

17. Acquiring the stakes

18. E.On’s Initial 38.5% stake in Ruhrgas was acquired from several companies including Vodafone andVodafone Gelsenberg E.On acquired a further 40% stake from ShellShell, Exxon-Mobil andExxon-Mobil Preussag Final 20% stake was acquired from RAG coincident with the sale of Degussa to RAG

19. Approval process

20. Key stages in the approval Initial application to Federal CartelFederal Cartel Office Appeal to the Economics Ministry Court injunction (followed by out of court settlements)

21. Initial application to the Federal Cartel Office for approval to acquire 100% of Ruhrgas AG Rejection of this application on the basis that E.On would increase its already dominant position in the German gas market Jan 02

22. E.On appeals this rejection to the Economics Ministry, seeking an exemption on the basis that the benefits to the German economy out weight the loss of competition Economics Ministry over-turns the Federal Cartel Offices’ initial rejection Jul 02

23. Several objectors to the proposed deal were successful in obtaining an injunction from the Düsseldorf court on the basis of procedural errors in the Economics Ministry’s over turning of the Cartel Offices’ initial rejection Economics Ministry conducts a second investigation that corrected the alleged procedural errors and confirmed its’ previous over-turning of the Cartel Offices’ rejection, but with additional concessions Sep 02 Aug 02 Düsseldorf court maintained its injunction until its’ final decision was expected in late January 2003 (later confirmed as 31 st ) Dec 02 Court decision was widely expected to up hold previous rulings blocking the Economics Ministry’s clearance on the basis of market dominance rather than procedural error

24. E.On begins negotiations with the 9 plaintiffs to obtain out-of-court agreement on suitable concessions Plaintiffs withdraw objections before Düsseldorf court case begins as suitable out of court agreements are reached Jan 03 Key risk of the court case was that it could be referred to the EU who would be in a difficult situation of needing to appear to not simply be following a lower court, but also to not totally ignore the findings of a lower court. Referral to the EU could also have allowed OFGEMOFGEM to object E.On also had the option of appealing the Düsseldorf court’s ruling to the German Supreme Court, but this could have delayed proceedings until the end of 2004 Further issue that RAG’s €38 per share bid for Degussa would lapse on 31/1/3 unless the court ruled in E.On’s favor on the Ruhrgas acquisition

25. Objections

26. 9 objectors EnBW Trianel Stadtwerke Rosenheim Stadtwerke Aachen GGEW Fortum Ampere Concord Power Ares Energie Had the Düsseldorf court case proceeded and then been referred to the EU, OFGEM may also have been able to object on the basis of reduced competition of gas supply to the UK

27. CompanyBasis of objection to Ruhrgas acquisition Ampere Concerned that a reduced number of suppliers could adversely effect their broking activities. Ares Energie Concern that an enlarged E.On would make it difficult for Ares Energie to grow its share of the German market. Concord Power Could result in unfavorable gas supply conditions to a planned power station in Lubmin (in the north-east). EnBW Possible 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. Fortum Concern that an enlarged E.On would make it difficult for Fortum to grow its share of the German market. GGEW Possible 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 Aachen Possible 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 Rosenheim Possible 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. Trianel Concerned that a reduced number of suppliers could adversely effect their broking activities.

28. Regulatory concessions

29. Key classes of concessions Divest businesses Auction gas allocations Grant favorable supply conditions to divested firms Commit to investment program Economics Ministry viewed this as essential, but it was not included in the final concessions

30. Divest businesses Stake in Bayerngas Stake in Stadtwerke Bremen (Ruhrgas) Stake in VNGVNG Stake in EWEEWE (Oldenberg) Stake in Gelsenwasser Stake in Thuega Many of the plaintiffs wanted this concession included but in the end it was excluded An additional criteria imposed was that the divested businesses must be sold to viable entities to ensure that they provide real competition to E.On

31. Auction gas allocations Auctions to be in October 2003, 2004 2005 and 2006 Auction 200b kWh of gas to competitors Two auctions to occur at the Emden/BundeEmden/Bunde hub Two auctions to occur at the Waidhaus hub

32. Grant favorable supply conditions Companies that buy more than 50% of their gas from E.On or Ruhrgas have the right to re-negotiate their contracts, including reducing their contracted consumption by up to 20%

33. Acknowledgements

34. Utility Consultants Ltd acknowledges the help of the following people in compiling this report Gill Griffith-Jones, Reuters A kind lady who wished to stay anonymous

35. Feedback

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