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Power companies have little room left for more price cuts
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Power companies have little room left for more price cuts

December 15, 2014
Interview with Balázs Lehőcz, CEO MET Power Group – Napi Gazdaság, 15 December 2014 Translation from the original Hungarian

There is marginal room at best in the Hungarian power market for any further prices cuts, Balázs Lehőcz, chief executive of MET Power, told Napi Gazdaság. Dunamenti Erőmű has been running at low capacity since it was taken over by [MET] and its unused sites will likely be converted into an industrial park.

Why is MET buying out the Hungarian power trading portfolio of GDF Suez instead of boosting its market share through organic growth?

The French energy company is gradually pulling out Central and Eastern Europe, focusing instead on South American markets, so it is looking for partners who can take over its local operations while maintaining high standards. That's why they invited tenders, and with bids coming from six market players, they finally picked us. You see, this is not a huge portfolio, it makes up only around half a per cent of the Hungarian power market.

It’s not only GDF but also other Western European utilities that are exiting Europe though. Why is it worth for a regional energy company stepping in to take their place?

Central and Eastern European markets offered good opportunities for Western energy companies to make money until 2008-2009. Since that time the industry’s profitability in the region has dropped, while risks have not decreased. With all major players looking to sell, the value of assets has dropped. Central-Eastern Europe no longer offers sufficient profitability to giants like the French group, but it is still worth operating here for smaller traders. This scenario favours businesses that are adaptable and react quickly, like MET.

This year MET bought a majority stake in Dunamenti Erőmű from GDF. How has that deal lived up to expectations so far?

We have spent the recent months looking into the conditions of the power plant and the site. We have also explored business opportunities. Regarding power generation, we do not expect any significant rise in prices next year, so we will most likely run only the most modern G3 block. However, we have a couple of investment ideas lined up. We would like to improve the efficiency of power generation because in order to become truly competitive we do not need 128 hectares to produce slightly more than 400 megawatts of electricity, as this is not viable over the long haul. We're also focusing on restoring synergies with Mol's Dunai Finomító refinery but thanks to technological upgrades the facility does not need as much steam as before.

At what capacity has the G3 block been running over the past months?

We did generate power in the third quarter but the block was not on line all the time. The unit did operate in the first month because it was productive from a business perspective. In the remaining two months the market moved in a direction that led us to buy back from the market the electric power we already sold, saving our equipment, while we sold the gas intended for power generation. These opportunities for optimisation are what helps MET gain advantage.

Despite all that, do you see any room for upgrades at the Dunamenti power plant?

When we bought a majority stake in the power plant, we were not only thinking about how we would keep all the turbines up and running, but also how we would utilise the sites of the plant. These 128 hectares are excellent from an infrastructure point of view because the Danube is close, there is a railway station, the motorway also runs here, which make it a prime industrial zone. This means we can provide space to energy or petrochemical projects, or maybe pharmaceutical projects, aligned to the characteristics of the power plant. Moreover, obtaining an environmental licence would also be easier for brownfield projects compared to greenfield developments.

Does that mean you do not foresee expanding the plant’s power generation capacities, by, for example, altering one of the blocks to make it suitable for alternative energy sources?

We're keeping profitability in mind, and of course we do not rule out anything, but currently we do are weighing this as a possibility.

According to government plans, Hungary will have the lowest power prices in Europe in four years, with certain industrial energy cost cutting measures expected to play a part in that move. With such outlook, are you sure it is a good idea to buy a power plant and a power trading portfolio in the country?

The high costs of maintaining large billing and other internal systems are significantly eroding the profitability of traditional big utilities. Compared to that, MET is slimmer, which reduces costs, so for us it is still worth being active in this business sector. We have no information on specific government measures here, but we were pleased to take note that opportunities for coordination with the industry will expand. Electricity prices Hungarian consumers pay are somewhere in the middle range in Europe. As far as I know, there is only a minimal wiggle room in the system for price cuts compared to current levels.

Are you not worried that changes in the regulatory environment in the next four years will dent your profitability on the domestic market?

Our power trading business is based in Hungary but we do think at a regional scale. Regulation could change for the worse, but I do not see it likely that prices in the commercial market, where our main interests are invested, would decline much further. I do not believe that these fees require any major intervention.

Where do you see more room for expansion?

Apart from the region where we are already present, we are interested in markets in the Balkans, and later possibly also in Turkey, but first we have to grow big enough in Romania to enable us to expand into Bulgaria and then move on to Turkey. We will not expand our assets in Hungary at the moment; the Dunamenti power plant was a big enough bite. However, if we happen to pinpoint opportunities for renewable energy production in neighbouring countries that seem suitable for us in size and location, then it cannot be ruled out that we will enter those markets with a partner. Meanwhile, we are constantly expanding our presence in the international gas trade, we have just signed our first contract for liquefied natural gas in Spain.

Is it possible that MET will enter the household energy supply market soon?

Right now this is not our main field of business, large IT systems and a great deal of investments would be needed there. This market segment is more regulated, indicating that there is no room here for more than one or two players that could also be at least partially state-owned. However, this is not unique: state-owned companies dominate the household market in France, for instance.

What will be the business year like for MET?

In terms of figures, it will be mostly in line with our business plans, but narrowing margins in this market do affect our operations. What we see is that we have to do more business than before to achieve the same levels of profitability.

In 2012 MET posted a remarkably high profit of over HUF 50 billion. What will profits for this year look like compared to 2012?

It will definitely be less. While the press at the time was reporting about the owners of MET taking out HUF 55 billion in dividends in 2012, it is important to stress that on the one hand, this was the sum of dividends accumulated over several years, and on the other hand, the owners actually have not taken this money out of the company and spent it, but had it immediately reallocated within the group. When a bank finances a company, the commitment of stakeholders is an especially important consideration besides profitability because that also plays a part in setting the conditions for the loan. If lending, which is indispensable to finance transactions, is not sufficient, then we will not be able to make enough deals and meet our growth plans.

Part of the press attributed your 2012 earnings to a deal in which MVM was allowed to sell gas to MET at a discounted price with hardly any profit, while MET reaped huge profits when it sold the gas on to domestic district heating utility companies.

Obviously, I do not have access to MVM's specific figures, but I do know that MVM was just entering the gas trading market at the time, and, that being an entirely new business,  they obviously could not have in place all the practice needed to immediately be able to handle transactions of this complexity, type and scale. Considering all that, as far as I know, after talking to several energy traders MVM decided to sell the capacities it held at market prices. As a result of the negotiations, MET made the best offer, while also taking over much of the risk from MVM. If managed well, that agreement could turn profit, but it just as well could have generated huge losses.


Author of the article: Lóránt Dékány


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