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MARKET WATCHERS SAY CHANGES ARE NATURAL

Owners change in Slovak energy sector

Slovakia’s energy companies have recently seen several ownership changes, such as the Czech Energetický a Průmyslový Holding (EPH) entering the natural gas utility Slovenský Plynárenský Priemysel SPP earlier in 2013, only to leave its share in the parent company to the state while acquiring a stake in a regional power distributor Stredoslovenská Energetika (SSE). Analysts and experts say such changes are natural and reflect the current development of Europe’s energy market.“In general, energy suppliers change owners everywhere,” Zuzana Lukáčová, head of analysis at Energy Analytics, told The Slovak Spectator. “As long as it does not happen on a big scale, and it does not in Slovakia and in neighbouring countries, it is natural.”

The natural gas sector has seen some ownership changes.(Source: SME)

Slovakia’s energy companies have recently seen several ownership changes, such as the Czech Energetický a Průmyslový Holding (EPH) entering the natural gas utility Slovenský Plynárenský Priemysel SPP earlier in 2013, only to leave its share in the parent company to the state while acquiring a stake in a regional power distributor Stredoslovenská Energetika (SSE). Analysts and experts say such changes are natural and reflect the current development of Europe’s energy market.
“In general, energy suppliers change owners everywhere,” Zuzana Lukáčová, head of analysis at Energy Analytics, told The Slovak Spectator. “As long as it does not happen on a big scale, and it does not in Slovakia and in neighbouring countries, it is natural.”

Ľuboš Vančo, managing partner of KPMG in Slovakia, sees several reasons behind the recent changes in Slovakia, but considers changes on Europe’s energy map as the most important, such as the launch of the Nord Stream natural gas pipeline via the Baltic Sea, which will transport Russian gas to Germany. Also noted were strategic changes in individual European countries’ energy sectors, like Germany’s switchover from nuclear power to renewable energy; significantly higher energy prices than, for example, in the US; and increased energy regulation in central Europe.

According to Pierre Pončík, manager at the consulting department at Deloitte Slovensko, the main reasons for the changes pertain to the global strategy of foreign investors. Both E.ON and GDF SUEZ declared their priorities to focus on emerging countries by leveraging their presence in Europe; to decrease the role of regulated assets in their portfolio, which means less infrastructure and more generation of assets and renewables; and to prefer full control governance. At the regional level, two other factors could be mentioned: increasing pressure from regulators, as is seen in many EU countries, and a 10-year investment payback period.

Lukáčová sees three main factors behind these changes: the energy market, the regulatory environment and the economic crisis.

“The Slovak energy market has gradually stabilised and the key players have defined their positions, completed by a number of relatively smaller suppliers,” Lukáčová told The Slovak Spectator. “Competition has thus defined not only market shares but has also affected margins for non-regulated segments. Decreasing margins can be a motivator to leave and search for a new business opportunity where the trend is the opposite.”

On the other hand, according to Lukáčová, the current margins are not negligible, and they attract new investors that know the Czech and Slovak markets well and have good local connections and backgrounds to support their business.

Regulation is a long-term problem, already addressed by the European Commission due to a lack of transparency, and its independence is also questionable, according to Lukáčová.

“Despite the original strategy, which outlined a gradual loosening of regulation and finally no regulation at all, even for households, regulation has strengthened and now also includes small businesses,” said Lukáčová. “The result is both smaller margins and prescribed tariffs, leaving very little space for competition and leading to more or less almost identical offers. Again, this is a good reason to question if you want to stay in such a market. ‘Domestic’ investors think they will be able to operate even in these conditions.”

Behind all this is the economic crisis, resulting in lower volumes of sold energy and therefore also lower absolute margins. Companies can decide to save by leaving small markets and concentrating either on a few bigger markets and/or search for new ones with higher profits or even new industries, according to Lukáčová.

The changes in Europe are bringing changes in ownership relations, changes in the structure of energy sources, and price fluctuations, all of which are visible in Slovakia, according to Vančo. Because of the current low electricity prices, some power stations are being mothballed and do not produce electricity. Planned projects are being re-evaluated and new projects are being postponed because they are not profitable in the current environment.

“We can see similar moves also in neighbouring countries, thus these changes are not specific only to Slovakia,” said Vančo. “Some projects of gas-fired power stations were halted, projects of nuclear power stations are being re-evaluated, new interconnections of gas and oil pipelines with neighbouring countries are being analysed.”

Pončík does not see Slovakia as an exception, either.

“The same is happening in neighbouring countries, except for Poland: for example, the Czech Net4gas was sold by RWE, and [in] Hungary the state is buying back assets from big utilities like E.ON,” said Pončík.

Martin Vlachynský, analyst with the economic think tank INESS, agrees, adding that exchanges in the positions of dominant players are common in the market economy as each company adjusts its targets and strategies over time.

“The energy market is among the most regulated within the economy, which means that the consumer cannot expect huge changes from the arrival of new investors; investors can move only in a narrow corridor,” Vlachynský told The Slovak Spectator. “This brings some positives and relatively many negatives. One of them is a high rate of uncertainty resulting from a possibility of an unexpected change in regulation, for example by the introduction of new rules or fees. This distracts them from making investments or motivates them only toward such investments where the risk is compensated by higher revenues.”

With regard to changes that have taken place in Slovakia, Lukáčová said that natural changes that do not affect the core business result in new company logos and probably new communication and marketing strategies.

“In terms of what new they can offer there is a little space,” she said. “In SPP, the state will be the supplier and openly declares its interest in lower or at least stable prices. I do not think we can expect big changes in the actual tariff structure. EPH in SPP will be basically invisible for the public and can concentrate on optimisation of processes and cost saving.”

In SPP-distribúcia, a subsidiary of SPP that deals with customers and suppliers, its offer is regulated, and basically nothing will change.

“More interesting is EPH in SSE,” said Lukáčová. “Our market is still in the phase of price competition, even though additional services or discounts on products are common, which speaks to the continuing sale of electricity and gas with various forms of discounts. However, EPH might try to bring something from more developed markets, combine other commodities [or] offer new services. We have to wait and see how it will work since EPH has a significant market share and serves a large number of customers.”

According to Pončík, assessing the situation is challenging, as the changes are too recent or have not yet taken place, and because the new investor has not yet communicated much about the strategy for next year.

“Finally, the situation is even more difficult to comprehend due to the coming changes concerning the SPP parent company and the state getting full control over it,” said Pončík.

SLOVAKIA’S POSITION


Key motivating factors for investing in the energy sector are a stable and business-friendly environment in the given country and potential opportunities, according to Pončík, adding that the recent changes in SPP and SSE did not change those parameters.

According to Lukáčová, as an investor you want to make money and you want a secure environment that enables you to do so, and thus it is difficult to determine Slovakia’s position as a destination for energy sector investments.

“Unfortunately, due to regulation the answer is complicated,” said Lukáčová. “With households and small regulated businesses you can make small money due to the regulation whereas, with industries you might make money if the competition enables it. You can decide to target non-regulated SMEs, but still, you are insecure if some of them become regulated in the future and cut your margins.”

Unfortunately, the situation seems to be influenced by the political situation, according to Lukáčová. If a left-wing government is in power, the guarantee of low or stable energy prices is a strong argument to secure votes. It naturally translates into regulation or other market interventions feared by investors.

“Lately we have witnessed foreign investors leaving, but there are some who stayed and still see potential,” said Lukáčová. “EPH is a special example of a company entering a market in this situation because they know the environment and can lobby effectively in their interest.”

When comparing Slovakia with other countries in the region, markets at different stages are included, according to Lukáčová. Each have their specific features, for example, the Czech energy market is fully non-regulated on the supply side, and therefore theoretically more attractive, but you also have to take into account the competition and space available for newcomers. Also, governments might encourage investors by offering incentives thus changing the total numbers again.
In Lukáčová’s opinion, the most attractive segment is bigger, non-regulated SMEs.

“They still generate interesting margins and competition is not as tough as with big industries which used to be the main target for competition due to high consumption,” said Lukáčová. “Nowadays, the competition has lowered the margin extremely close to zero, or sometimes even below, hoping to generate a profit in the long run when the market settles down.”

Vančo is seeing smaller projects that require less significant investments at their inception.
“Nobody would go for large projects without significant direct or indirect support of the state because it is not worth it under the condition of current prices,” said Vančo.

OWNERSHIP CHANGES

Earlier in 2013, Energetický a Průmyslový Holding (EPH), controlled by Czech entrepreneurs Daniel Křetínský and Petr Kellner and Slovak financial group J&T, bought a 49-percent stake with managerial control in SPP, for €2.6 billion from its foreign shareholders E.ON Ruhrgas and GDF SUEZ. The remaining 51 percent is managed by Slovakia’s National Property Fund (FNM). Along with this it obtained a 49-percent share in SPP’s subsidiaries SPP-distribúcia, which manages the gas distribution network in the country, and Eustream, the natural gas transporter and operator of the transmission system in Slovakia. Now the state is obtaining 100 percent in SPP while EPH is keeping its shares in SPP-distribúcia and Eustream.

EPH is also planing to acquire a 49-percent stake in the regional electricity distributor Stredoslovenská Energetika (SSE) from Electricité de France, with managerial control, reportedly for €400 million. The general assembly of SSE approved the entry of the new shareholder into the company in early September 2013, the SITA newswire wrote. The deal is still subject to the government’s approval.

Foreign shareholders of the remaining two regional energy distributors, Západoslovenská Energetika (ZSE) and Východoslovenská Energetika (VSE), have not mentioned any plans to sell their stakes. Thomas Jan Hejcman, head of VSE, told the Hospodárske Noviny daily on October 3 that RWE, the German investor in VSE, does not plan to leave VSE.

“Currently we are successful in Slovakia; we have launched another company, RWE Slovensko, which should shelter, create and coordinate other activities of the concern in Slovakia. We would not have launched it if we were planning to withdraw.”

A top representative of the German group E.ON, holding 40-percent in ZSE, confirmed to Slovak Economy Minister Tomáš Malatinský that they are not leaving ZSE, the SITA newswire reported in late August. The state holds 51 percent in ZSE while the remaining 9 percent is held by the European Bank for Reconstruction and Development.

The Italian energy group Enel holds 66 percent in the dominant electricity producer Slovenské Elektrárne. Some bankers and analysts have speculated that Enel could sell its stake in the Slovak energy sector including nuclear plants as part of its plans to sell €6 billion of its assets by the end of 2014 to cut debt, Reuters wrote on October 2013.

“We won’t exit the nuclear industry and will actually invest more in it if given a chance,” said Enel’s chief executive officer and general manager Fulvio Conti when asked if his company would cut its stake in Slovenské Elektrárne, which generates nuclear power, as cited by Reuters.

For more information about the Slovak business environment please see our Investment Advisory Guide.

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