While energy price regulation and falling profits have dimmed the lights at Slovenské Elektrárne (SE), the state electricity monopoly's main supplier is reporting healthy results and bright prospects for the years to come.
The Slovak Energetics Engineering Works [SES a.s. Tlmače], one of SE's giant suppliers, reported a gross profit of $2.17 million for the first seven months of this year, up from a $2.15 million profit in FY1997 and an $18 million loss in 1995.
SES Tlmače is a major engineering company focusing primarily on the production of water boilers for SE, their main client. "We are working on the biggest contract in our history with Slovenské Elektrárne. It is a five billion Sk [$140 million] contract focused on environmental improvements and revitalization of the Vojany power station," said Viliam Petríč, marketing director at SES Tlmače. The contract calls for four distinct projects, two of which casts SES Tlmače in the role of a main supplier to SE and two of which make SES a sub-supplier to the Austrian company Austria Energy.
"After changing the shareholders structure of the company, SES enjoyed higher profits in 1997, and their business plan is close to being fulfilled," said Martin Kabát, a broker with Bratislava's Slavia Capital. "They do not depend on the Slovak energy market any more. Their long term programme is to expand because their capacities are now much higher."
However, SES Tlmače's long-term outlook could be considerably improved by energy price deregulation, and could be significantly damaged by the National Bank of Slovakia's recent decision to cancel the fluctuation band of the Slovak crown, allowing the currency to devalue by approximately 17%.
"It is too soon to say what the exact numbers will be, but in my opinion it will affect the SES Tlmače's results," said Tibor Novosad, director of Financial Management Projects Department at SES Tlmače. "But I am also convinced that after the stabilisation of executive power in Slovak politics, the exchange rate of the crown will tighten up and return close to the exchange rate before October 1,1998."
SES Tlmače has become increasingly leveraged over the years, as the share of total loans on total assets has risen from 52.4% in 1995 to 91.07% in 1997. As most of these loans are held by foreign debtors, Tlmače could face tough repayment costs with the recent currency devaluation.
But Novosad reported that even if rates do not improve, the effect on SES's earnings may be only slight. "Most of our contracts include a devaluation clause. They compensate for particular crown exchange rate changes that are finally shown in our contract prices."
As far as energy price deregulation goes, Novosad agreed that liberalising prices would have a revitalising effect on the entire energy sector. "Energy prices should follow the inflation curve for next few years," he predicted. "According to our financial forecasts, I predict that increasing energy prices by 10% might resolve the most important problems for producers and distributors, while a 20% hike would facilitate the renewal process and a 30% rise would cover development activities in the energy sector."
Both Novosad and Kabat agreed that price deregulation was a necessity for the energy sector. "Energy producers and distributors carry too much of the burden of the deformation in energy prices," said Kabát. "That doesn't leave enough money for new investment and so on."
Novosad explained that "the deregulation of energy prices has two aspects - the political and the professional. Politically, deregulation definitely means increasing energy prices, which cannot be popular at all, but I think that no government can avoid it."