VNG significantly reduces risks from replacement procurement of gas
Karlsruhe. VNG has reached an out-of-court settlement on a gas purchase agreement with WIEH GmbH. This significantly reduces the risks for VNG from replacement procurement to make up for the shortfall in gas volumes. However, compensation continues to be necessary in order to deal with the losses under a second contract that is still in force. Both contracts expire at the year-end.
In its half-year report and by ad-hoc notification dated 9 September 2022 together with an accompanying press release, EnBW Energie Baden-Württemberg AG (EnBW AG) reported that the cessation of gas supplies from Russian production is causing significant losses.
This affects two gas purchase agreements at VNG Handel & Vertrieb GmbH, a wholly-owned subsidiary of VNG AG (referred to together hereinafter as VNG), in which EnBW AG holds 74.21% and which is fully consolidated in the EnBW consolidated financial statements. So that it can continue to supply its customers reliably on the original agreed terms, VNG has been and continues to be required to make up for the shortfall in gas supplies by procuring replacement volumes on trading markets at massively higher prices as a result of the war. This applies to both purchase agreements.
In the case of the gas purchase contract with Russia’s Gazprom Export (GPE) for 35 terawatt-hours (TWh) per year expiring at the end of 2022, VNG itself is the importer. The financial impact relating to this contract as a result of the supply shortfalls depends in particular on whether and to what extent these losses to VNG can be compensated for following cancellation of the gas levy. Talks with the German government on this subject continue.
The second gas purchase contract for 65 TWh per year is with WIEH GmbH (WIEH), a subsidiary of SEFE Securing Energy for Europe GmbH (formerly GAZPROM Germania GmbH), a German company that has supplied Russian gas to VNG. Because this purchase contract has not been consistently fulfilled since mid-May 2022 due to GPE ceasing to supply WIEH, VNG had to make up for the undelivered gas volumes by procuring gas at considerable additional cost in August and September 2022 in order to be able to supply its customers. Due to the accumulated and expected financial impact from this in addition to the first-mentioned contract, VNG submitted an application on 9 September 2022 to the German Federal Ministry for Economic Affairs and Climate Action for stabilisation measures under section 29 of the Energy Security of Supply Act.
Negotiations between VNG and WIEH on the apportionment of the additional costs have now been concluded with a settlement. Under the settlement, WIEH will meet the additional costs of replacement procurement in 2022 and will refund the financial impact of replacement procurement borne so far by VNG. The supply relationship also expires at the end of the 31 December 2022 gas day.
In combination with the expiring gas purchase contract with GPE, the settlement conclusively ensures that VNG will no longer have any risk under either of the two purchase contracts from the beginning of 2023 onwards. Whether and to what extent VNG will uphold its application for stabilisation measures under section 29 of the Energy Security of Supply Act has not yet been decided.
The specific effects of the situation on the financial position, financial performance and cash flows of the EnBW Group also depend on further talks with the German government on compensation for VNG's losses from replacement procurement following the cancellation of the gas levy and cannot yet be conclusively estimated. From the present perspective, an earnings impact is expected for 2022 that will likely be below the risk range of up to an additional €1.3 billion referred to in the half-year report under significant events after the reporting date, but above the earnings impact of € 545 million already taken into account in the half-year report.
As the third largest German gas importer and storage operator, VNG is system-relevant for security of supply in Germany and structurally relevant for Saxony and eastern Germany. VNG supplies gas to approximately 400 municipal utilities and industrial operators (approximately 20% of German gas requirements in 2021).