UPDATE 3-RWE breaks free from some expensive gas contracts

Thu Nov 10, 2011 8:34am EST

Related Topics

* Says ended or changed some loss-making gas contracts

* 9-mth opg earnings drop 30 pct to 4.3 bln eur

* Average estimate from 12 analysts was 4.3 bln eur

* Reiterates 2011 opg profit to fall some 25 pct

* Shares rise 3.5 pct, Stoxx Europe utilities up 1 pct

(Adds CFO comment, analyst comment, background)

By Peter Dinkloh

FRANKFURT, Nov 10 (Reuters) - Germany's RWE is set to make big savings after amending some contracts that forced it to buy gas at prices higher than it could sell it for.

As a result of those contracts, which tied the gas price to the oil price, the utility lost hundreds of millions of euros, as did peers such as E.ON or GDF Suez.

Long-term contracts in Europe with suppliers such as Russia's Gazprom or Norway's Statoil have for decades tied the cost of gas to the oil price.

But gas prices at hubs such as Zeebrugge have risen less than the oil price so that utilities have to sell gas from long-term contracts for about 25 percent less than what they pay their suppliers, energy consultants Wood Mackenzie estimates.

RWE has managed with three of its suppliers to either end some long-term contracts - which in total account for half of the RWE's gas purchases and run as long as 2036 - or to index them to the price of freely traded gas on European exchanges, it said on Thursday.

Deutsche Bank analyst Hasim Senguel said that "is clearly a positive sign and can be a short term trigger."

RWE shares were trading up 3.49 percent at 29.04 euros at 1327 GMT, outperforming the Stoxx Europe utilities index , which was up 1.18 percent.

Negotiations with Russian state-owned gas monopoly Gazprom, the world's largest natural gas producer, are continuing, RWE Finance Chief Rolf Pohlig indicated.

"It's about a lot of money in an area where we have different opinions. That's certainly more confrontational," he said.

Russia is playing "hardball" said Frank Umbach, writing for the Geopolitical Information Service.

"Norway has shown a lot of flexibility so as not to lose important market share in Europe. But Russia considered itself to be in a stronger position and insisted on its long-term contracts," he said.

The country appears to have demonstrated some flexibility, as Gazprom said in February it introduced market prices in contracts with some clients, and Greek's DEPA and Italy's Edison have said they won cheaper contracts with the state-controlled company.

Gazprom is particularly important for RWE after the 113-year-old German utility this year considered giving up its independence and merge with Spain's Iberdrola.

Those talks failed and RWE is now discussing with Gazprom to jointly build or operate power plants and to get cheaper gas.

RWE's creditworthiness has been downgraded by Fitch, Moody's and Standard & Poor's and operating earnings in the first nine months dropped 30 percent to 4.3 billion euros, as expected by analysts.

The government forced RWE to shut down two nuclear power stations after the Fukushima nuclear meltdown and levied a tax on nuclear fuel on power providers, burdening profits.

Lower demand due to the economic crisis suppressed power prices from all time highs reached in the middle of 2008, burdening power companies for years to come as they sell most of their power as many as three years before it is produced. ($1 = 0.736 Euros) (Reporting By Peter Dinkloh; Editing by Chris Wickham and Hans-Juergen Peters)

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