(The following statement was released by the ratings agency)
Feb 14 - Fitch Ratings says today that substantial capital expenditure plans in the Central European (CE) power sector are among the most important reasons for the consolidation of state-owned companies into larger energy groups in some countries, including Poland, Bulgaria and Lithuania.
Fitch expects CE utilities to increase their capital expenditure in the next five years as the companies modernise and/or replace their ageing generation, transmission and distribution assets. In addition, investments in new generation capacity are required as demand for electricity continues to increase, fuelled by strong GDP growth in the region.
Furthermore, Bulgaria, Lithuania and Slovakia have multi-billion US dollar nuclear power plant projects to replace their old nuclear plants, which will be decommissioned or have already been partly decommissioned as agreed with the European Union in negotiations regarding these countries’ admission to the EU.
In this context, some CE countries view consolidation of their state-owned energy companies into larger, often vertically integrated, national champions as a way to restructure the sector and facilitate the funding of large investments. Fitch believes that consolidation into larger groups may be positive if it leads to vertical integration, from generation, or even coal mining, to distribution and supply. Such consolidation potentially lowers the companies’ business risk profiles and, depending on the financial terms of the transactions, may enable the new groups to obtain external funding required for investments on more favourable terms. However, it remains to be seen how these new groups will be integrated and managed, and whether cost efficiencies and synergies will be achieved. In addition, planned ownership unbundling requirements by the European Commission may force the new groups to dispose of some of their network assets, possibly increasing their risk profiles.
The Bulgarian government has recently announced plans to consolidate five state-owned energy companies, including the National Electric Company NEK, the leading gas company Bulgargaz Holding, the Maritsa Iztok coal mines, the Maritsa Iztok 2 thermal power plant and the Kozloduy nuclear power plant, into an energy holding company. This is expected to result in a national champion with assets of about EUR4bn by end-2008. The financial firepower of the new group should place Bulgaria in a strong position to invest in neighbouring countries and help fund planned investments in the energy sector, including construction of the EUR4bn, 2GW nuclear power plant at Belene.
Lithuania has also decided to join the forces of its energy companies ahead of large capital expenditures and consolidate them into a new entity, Lithuanian Electricity Organization (LEO LT). The new company will be comprised of state-owned transmission system operator Lietuvos Energija, state-controlled distributor RST and privately-owned distributor VST. The state will control a 61.7% stake in LEO LT, with the remaining 38.3% held by privately-owned NDX Energija. The new company will be responsible for strategically important projects, including the construction of the Ignalina nuclear power plant, in which Latvia, Estonia and Poland plan to cooperate, and interconnection projects with Poland and Sweden. This week the Lithuanian president signed the amendments to the law on nuclear power plants, which paves the way for the creation of LEO LT.
In 2007, the Polish government consolidated the country’s state-owned part of the fragmented power generation and distribution sector through the creation of four large, vertically integrated groups, including PGE Polska Grupa Energetyczna and Tauron Polska Energia. Both companies have sizeable capital expenditure plans for 2008-20, earmarking EUR11bn and EUR8bn, respectively, for their projects.