The true story of the big gas deal

2014. 12. 11.

Interview with Gergey Szabó, CEO MET Hungary – Figyelő, 11 December 2014

Translation from the original Hungarian
 

Before the elections MET Hungary often came into focus for its business link with the MVM Group and for paying a dividend of HUF 55 billion in 2012. The recently appointed CEO of the company gave his first interview to Figyelő.

The centre of MET Group is in Switzerland, but there are also enterprises in Central Eastern Europe. Which enterprise are you assigned to manage and what did you do before?

I was the CEO of MET International since its founding in Switzerland, then as of 1 December I became the CEO of MET Magyarország Zrt. Besides this, it is my task to coordinate gas, oil, electric and power-related activities of the Group in Hungary as a Country Manager. In addition, as the chairman of our Croatian subsidiary's board, the gas sales activity in Croatia is also my responsibility. The history of the company began at the Gas Business Development Unit of MOL, where several of my current colleagues and I were tasked with many operations. One of our projects was MET itself (MOL Energy Trade) founded in 2007 with the aim of managing purchase and sales positions within the group. When MOL sold its gas sales activity in the regulated market to E.ON, we could only trade on the competitive market, but this was soon extended and we appeared on the international markets as well. By 2010 we founded a foreign subsidiary for the coordination of our international activity. This was MET International AG with me as its CEO, so I moved to Switzerland for four years. Today, we have a fully international team working there.

The Hungarian public is probably most interested in the story of 2012, when you were given a large contingent in the Hungarian–Austrian gas pipeline under the assignment of the Hungarian state. Then, after 2012, the company paid dividends of no less than HUF 55 billion to its shareholders. What was this famed deal really about?

Let's put this case into context, since there has been no real discussion about it before, and the media was full of partial information and faulty conclusions. 2012 was the last good year in gas sales in Europe. Profits have dropped significantly since then. A trading company can only operate well if the market is vibrant. In the last two years price differences between different countries and seasons (winter-summer) have disappeared, the optimization of which generated good profits earlier.

After 2012, however, still a nice dividend could be distributed.

The HUF 55 billion payout in 2012 was not the profit of a single year, but of several years, and this amount was reinvested into MET Holding by the shareholders. The reason of this is simple: in this industry you cannot approach international partners with a quasi-empty company. You have to show that the company is well-capitalized, and that you are also hurt if the company goes under. In addition, capital intensiveness starts at some tens of millions of euros of own capital. We were widely criticized for our mysterious shareholders, while (with no correlation) MET's revenues started to decline shortly after they got on board. So, if as accusations say, the shareholders had an effect on our profitability, then our margin should have increased despite unfavourable national and international trends.

I will surely ask some questions about the shareholders later, but let's return to the deal of 2012 for now!

In 2011, MVM, which had been active only on the electricity market, changed strategy, and entered the gas market. They started to build a team and take positions. They were only organizing themselves, when around the end of year they were given the task to support the campaign against high household utility bills with cheap gas provided to heating providers, which has become an urban legend by today. To this end, they were assigned [by the Hungarian state] transport capacity on the HAG Hungarian-Austrian gas pipeline, which had been divided through auctioning up to that time. This truly helped those, who already had some commercial relations and positions in the country and in the western world. But this entailed huge responsibilities and costs for network operators. Before the gas season, with a portfolio tending towards zero, this capacity essentially meant a lot of costs and risks for MVM.

Is this why they turned to you?

Not only to us. You should imagine this as if someone was awarded the right to host August's football world championship in June without any infrastructure or even a single football stadium. MVM could have tried it alone, but most probably they would have ended with failure and some billions of HUF of losses for the state. Actually, with the structure we offered, MVM could make offers to operators on the competitive market and heating providers without any risk whatsoever. They could do so because they could transfer capacities left unutilized and all related costs to MET. Without this option, a part of the above-mentioned HAG capacities would have been left at MVM, and, as said before, it would have recorded a loss as a result of this deal [assignment], that could have made the entire gas business of MVM loss-generating. At the same time, the storage capacity required for MVM's business activity was purchased from MET under fair market value, which generated further profits and competitive gain for MVM.

How many of you were in competition?

A lot, but only two teams remained on the short list.

E.ON Gas Trade was the other?

Yes. The agreement between MVM and the MET Group was concluded following competition with E.ON Gas Trade, since there was no other significant operator on the Hungarian market who could manage a position as large as this. For that matter, this was not really a price, but rather a service and risk-taking competition. The final solution, as I see it, achieved the potential optimum of the whole story: eventually, we also made some profits, and the state-owned company spared tax-payers some millions of Hungarian Forints of losses.

How much did you capitalize on MVM's dire circumstances?

I can only say that there was tough competition, both bidders wanted to win, and discussions were held in tight schedule up to the last moment.

Let me ask you another question about this deal, because I keep wondering about the maths part. 2012's results were approx. HUF 40 billion profit for you. How much of this profit can be attributed to this deal? The majority or only a smaller part of it?

Since we assess our options based on the entire portfolio, and not transactions, I cannot give you an exact figure on this. However, it should be noted that in reality the sums and profits are not by far as high as they keep echoing in the media. Thanks to regional growth, not more than 25 percent of the MET Group's revenues come from gas deals concluded in Hungary. The remarkable increase in revenues is not due to the above transactions.

The Hungarian public was interested in the whole story because of MET's mysterious circle of owners. As you have told us before, MET grew out of MOL, but today MOL is only a minority owner. Why did you have to include an external partner?

This is an important question. When the company was founded, this was an internal optimization platform of MOL. We found out that we had a lot of potential to grow, but as a 100-percent subsidiary of MOL we continuously bumped into obstacles and control mechanisms that were not activity-specific. If we were to strike a deal with a trader, then certain decisions could not be brought to the top management of MOL for approval. Obviously, this is not due to some defect in MOL, because the company was simply not established for such operations. This was our problem in the first place. And our role became represented in MOL as a new activity recently launched, which has low profits contribution, but requires huge financial and functional support and undertakes completely different risks. Both MOL's and MET's management saw this: we were given freedom, and in exchange MOL removed us from its sphere of consolidation and sold 50 percent.

To whom did they sell the 50 percent?

We had a scenario for three potential partners: it was sensible to establish a partnership with either an already operating international trading house, a financial investor with strong funding capacity or a partner with a competitive advantage in gas sources. Finally, MOL decided for the latter with the promise of favourable gas sources.

You can mostly find gas sources in Russia or its surroundings. At that time, Gazprom was expected to shortly lose its monopoly in natural gas export. So, you can confirm the Belizean company, Normeston was in fact a Russian investor independent from Gazprom?

I can confirm that, the company had a Russian background.

Players on the energy market are not surprised if company owners come from exotic countries, but the fact that it actually has Russian owners is no surprise either. Any gas molecule sold east of Vienna is likely to be originating from Russia. In some countries there is national production in internal markets, but the largest volumes come either from Siberia or Central Asia. We were also hoping that through the owner, MET could profitably obtain gas.            

Then you found out that you cannot close up to Gazprom. What happened?

We saw that outsourcing was a good decision in itself. The management could work independently. However, we did not get a gas source as a result, and we did not have a solid financial backer either. At that point MOL started to look for new shareholders. A private fund, RP Explorer Fund came into the picture, and MOL's share dropped to 40 percent, while MET ManCo. owned by our CEO, Benjamin Lakatos, gained shares of 10 percent. The press wrote a lot about this, but the fact that MOL remained a key shareholder was always left out from the reports somehow. Then, after acquiring the shares of Normeston, the final beneficiaries behind the foreign fund invested.

Did Normeston sell its interest with profits?

The short answer is: I have no idea. Shareholders' and managerial affairs are completely separate at our company, because all of our owners, even MOL, are financial investors. Accordingly, investors do not take part in the operation of the company, and we do not have to know how much the owners spent to gain shares. We are informed of changes afterwards. This is the normal way to do this.

I understand what you are saying, but I would like to ask something else about the shareholders. At our journal, the Figyelő, the General Editor is the “interconnector” where the editorial staff and the owner meet. How does the opinion of the final owners get into your work? Some articles in the media identified György Nagy and István Garancsi as possible owners of MET. Do you know them?

What is the General Editor for you is the managerial board for us, but the contact is still indirect. The shareholders delegate members to the board. We have no work relationship with the shareholders.

Who are the members of the board?

The chairman of the board at the Swiss Holding of MET is Csaba Lantos, while the executive members of the board are the CEO and the Chief Operating Officer. The shareholders include György Bacsa and Gábor Horváth for MOL, whereas the fund is represented by Jan Kridla and György Nagy. The board is called together quarterly, where the most prominent issues (agreed in advance) are discussed.

This fund with 50-percent interest you mentioned, is not RP Explorer anymore, but a company called WISD, according to your webpage. As far as I know, this acronym covers the initial letters of foreign operators behind the company...

Yes, but these issues are really out of my sphere of interest, the only reason I have to deal with them is because the public is interested.

MOL has a 40 percent share in the company. To what extent can the company be regarded as one linked to MOL?

Today, MOL is only a financial investor. We are engaged in the same sector, and there are some overlaps between our markets. It is a justifiable question whether we are in the same boat or do we cooperate or compete against each other. Our history unescapably binds us together, many senior members of the team started from there. The name MOL helped us in the first few years. Since then we have left the name behind; our relationship is quite complex, but we do our job independently. The fact that we know each others' colleagues helps a lot indeed.

This is an important question, because when MOL was choosing new shareholder partners, the businessmen coming forth were known to have close ties with MOL's management. István Garancsi is a former colleague of Zsolt Hernádi, President and CEO, while György Nagy is, in some respect, a business partner of Sándor Csányi...

I think it should be stressed that MET has not severed a part of the MOL Group's revenues, but was able to create value as an independent company. If we had cannibalized on MOL's business, the whole thing would not work today. I daresay MET could become successful because MOL was able to let it go. If this had not been so, we would not be here, and perhaps MET could not exist as it does today.

 I promise I will not ask more questions about the shareholders, but there is still one thing that I would like to know. Do you know all of your shareholders? The website atlatszo.hu has shown that the final beneficiaries of two companies behind WISD are György Nagy and István Garancsi, however, in case of the other two it bumped into exotic corporations. Do you have more idea about your shareholders than the media does? Do you happen to have some other exciting owners?

I would prefer to talk about the results and the future of the company rather than about its shareholders. Naturally, we do have to know all of our shareholders. Partners usually have a good look at the other party before entering into any contract, this is the so called “KYC” (know your client) procedure. We introduce our final beneficiaries to all of our energy trading partners and financial institutions contributing to our funding, and, of course, it is up to them to exercise ownership rights privately or as an enterprise, through a company registered in Hungary or abroad.

I heard that the entire group is four times bigger than the Hungarian business. Is this true? Can the group's figures be calculated by multiplying the public Hungarian figures by four?

Yes, in terms of revenues, but the consolidated figure is even higher if profits are considered, since more money can be earned now on the international markets. There are many extra taxes in Hungary, and it is worth mentioning that MET Hungary has paid a total of HUF 145 billion to the state in taxes and allowances in the course of its operation. This is really important to highlight, since we are always regarded as an offshore entity. Seriously, we needed a lot of time to understand that the public has an image of us as if we were some sort of a letter-box entity. Yet, MET Hungary and its three subsidiaries are working and paying tax in Hungary. And on the group level we provide job for nearly 300 employees in eight European countries.

The public may not only be preoccupied with this ‘offshore’ issue for this reason. Omninvest, the producer of influenza vaccine, also worked in Hungary, but the public wanted to know who the real owners are of a company that does business with the state.

If the in-depth audits of Europe's and the world's most prominent energy traders, banks and other competent authorities say that we are alright, then I think we can consider our company transparent. On the other hand, many players of this industry have foreign backgrounds, and many of them are working from Switzerland.

Other front-page news came from you saying that you acquired a majority in Dunamenti Erőmű (DERT) and the electricity business of GDF Suez. How did you come by that?

As I have mentioned before, the gas market showed deteriorating tendencies in 2012-13, so we started thinking about how to go on. We consciously tried to diversify our business. We supplemented gas with oil, electricity and LPG, but our growth was exclusively organic. Then, we were faced with the opportunity of the power plant. MET, as a trading company with a Central Eastern European focus, wanted to diversify, while GDF Suez, as a global energy champion, wished to distance itself from these positions and turn towards markets outside Europe.

So you found each other. And there was no competition at all?

We did have a competitor. What is more, we did not only have to beat our competitors, but also keep convincing GDF Suez not to decommission the power plant but to sell it. We had a good reason to buy the majority in DERT in two pieces. There were problems with timing; we had to get involved earlier in order to keep the company going. Yet, finally, we managed to reach an agreement. We see lots of value and opportunities, while the risks are just as many. In the third quarter, MET could ensure profitable market operation for block G3 of the power plant. We regard the production capacities of DERT as a real option that can be put into effect any time.

Are you looking for new possibilities? Are planning new acquisitions?

We believe in the energy business, the region, but in ourselves the most. Because the secret of MET's success lies in the team.

Author of the article: GERGELY BRÜCKNER

Source: Figyelő