Emerging Europe’s reluctant reform
Although liberalisation in central and eastern Europe is driven by the need to join the EU as soon as possible, utility sector reform in the region can be slow. But, while governments remain reluctant to sell off core assets, restructuring and IPOs have opened up acquisition targets to foreign predators. And those utilities that can shake off state support may also help to shake up the sector. Laurence Knight reports
But regulation is still at an embryonic stage. "The first attempt at pricing regulation in Poland linked gas prices to inflation, rather than to world energy prices," continues Hawes. "As a result, the gas monopoly PGNiG faced big losses when its gas supply price went through the roof last year, and the government was forced to change the system."
Privatisation has been one of the trickiest feats to pull off, and most governments have ducked it. "The privatisation of [Czech power company] CEZ has been on the discussion boards for years," says David Lasky, vice president in east European origination at Credit Suisse First Boston (CSFB). "However, it still has not gone through."
In many cases there has been public opposition to the sale of state assets to foreigners, while the weakness of the equity market means no country will be in a rush to privatise, unless it needs the money. And some governments in the region do face serious budgetary problems, Poland and the Czech Republic in particular. The Czech government hopes to sell gas transport company Transgas, as well as CEZ. In both cases, the sales will include distribution companies as well as upstream assets.
Despite the temptation to raise funds through privatisation, political reservations are still powerful. "The core assets of PGNiG - its transportation, storage and trade activities - will, I suspect, remain under government ownership for a very long time," says Hawes at Moody's. "There is still an issue of not selling off the family silver. But the company's distribution assets are more likely to be separated and sold off. This appears to be the typical pattern of partial privatisation in the region."
One of the more politically acceptable ways of selling equity in these companies is through IPOs. This was how Hungary sold a majority of oil and gas firm MOL, and other companies such as CEZ and PKN are also partially listed.
However, IPOs ultimately do not isolate companies from predatory foreign companies interested in expanding into the region, such as Gaz de France, Ruhrgas, or in MOL's case, Gazprom, the big Russian gas company that has been accumulating shares in its Hungarian neighbour.
State reliance slows issuance
The slow movement in privatisation has made raising finances trickier. Maryam Khosrowshahi, head of origination for central and eastern Europe, the Middle East and Africa at Schroder Salomon Smith Barney in London, says utility issuers in the region broadly fall into two categories: sovereign owned entities that benefit from their relationship with the state; and private companies with no real state support.
"Management in many state related entities are currently occupied with privatisation or restructuring processes, which also make their credit stories challenging due to the uncertainty regarding future ownership," she adds. "In the private sector, there are only a handful of companies with a sufficiently strong credit standing to issue bonds without any real or perceived state guarantee or support."
Khosrowshahi cites as examples of strong privately owned companies that could issue without state support the oil and gas companies PKN in Poland, MOL in Hungary and Slovnaft in Slovakia, in which MOL is a strategic investor.
"SPP and CEZ are still majority state owned, but do not have any state support and could issue very successfully on their own," she adds.
MOL is a rare example - from any industry - of a home grown and domestically owned private company with plans for regional expansion. It is competing with arch rival ÖMV of Austria for a 17.58% stake in PKN.
Like PGNiG, MOL is also a prime example of how government interference can undermine profitability. It is desperate to sell off its gas wing, which is running at a loss because the government has prevented household gas prices from rising in line with inflation. But while MOL can finance its acquisitions autonomously, the state owned companies of the likes of PGNiG are reliant on government support to raise funds in the capital markets.
Reliance on state guarantees is a major factor across the whole region. "Slovensky Elektrarne, the Slovak electricity company, wanted to do a bond this year," says one banker. "But its business is being broken up, so it is reliant on a state guarantee for any bond issue."
A major problem is that governments are under pressure to cut back on the guarantees they dish out, as the EU competition policy frowns on state support for public companies. With guarantees equivalent only to Eu60m in the Slovak government's 2001 budget, Slovensky Elektrarne has instead borrowed only in the loans market this year.
Romania provides an excellent case of the selective use of the state guarantee, as well as a surprising level of Eurobond dealflow. Termoelectrica, the state owned electricity companys is running heavy losses thanks partly to tariff controls. It secured a guarantee for its Eu150m three year offering in March this year. A large share of that money was then used to pay off arrears to SNP Petrom, the far more profitable state owned oil and gas company. Petrom in turn is set to price a Eu150m five year bond once markets recover, this time without a guarantee.
Petrom's issue follows a landmark unguaranteed deal from the region issued in February 2001 via Salomon Smith Barney and UBS Warburg - the Eu270m 10 year bond by Elektrownia Turów, a Polish state owned electricity generator, and only the fifth biggest in the country. "Turów was a double-B credit," says CSFB's Lasky. "The fact that it was able to issue on a 10 year maturity gives a lot of hope to other energy companies in the region seeking to access capital markets."
Turów's bond was sold on the basis of a purchasing agreement with the Polish national grid company, and a put option in the case that state ownership falls below 50%. This same put structure has been adopted by Romania's Petrom.
Other than the two Romanian names, Turów's bond has not heralded a rush of Eurobond issuers from the central European energy sector. Two Polish electricity companies - Lublin-Wrotkow power and ZEPAK - have instead relied on the loans market.
The only other major bond deal this year is an unguaranteed Eu450m issue expected from PGNiG. It is financing an upgrade of its transmission infrastructure, in anticipation of an increase in gas powered electricity generation.