Croatia: Experts warn power utility HEP to stop IPO process

1. June 2015. / SEE Energy News

Power utility HEP has retained 87% of electricity market, and the share of its own capital has been increased from 57% in 2013 to 62%, which is much above the average of the competing companies, such as RWE.

The conclusion of the analysis about the need for power utility HEP recapitalization, carried out by the professors of the Faculty of Economics in Zagreb, Ivan Lovrinović and Drago Jakovčević, and ordered by HEP Workers’ Council, is that the Croatian Electric Power Industry is not ready for privatization through the initial public offering of shares, and that the already started process, taking place under the influence of politics, should be abandoned.

The two professors emphasize that the initial offering of shares (IPO) represents a strategic move of the company which has previously been restructured and consolidated; therefore, it cannot be reduced only to the gathering of required funds. HEP is an excellently capitalized company which is currently undergoing restructuring, and the IPO can be considered only when this process has been finished and when the conditions in the company and on the market are optimal.

The economists say that, before privatization, it should be defined whether there are indeed actual needs for recapitalization, whether the distribution, transmission and hydro power plants will be privatized, whether a development strategy has been made and what the acquired money will be spent on. Currently, it is not the optimal moment for the IPO because the financial position of the company is excellent, new projects have been defined only partially or there are not any, and the readiness for the IPO is low and it takes place in the pre-election period. The fact that the current developments on the capital market are pessimistic also speaks against the IPO; there are no expectations of new IPOs either, whereas the wholesale price of electricity is low and it discourages the investments in new generation facilities.

Their conclusion is that it is necessary to postpone the process of HEP privatization in the pre-election time and that HEP is not and must not be a party company, but a strategic company the profit of which should not be used for patching up the state budget because, thereby, its stability is undermined and investments are jeopardized. The state should adopt a special law on HEP privatization and a master plan for the company development for a 10 year period. Drago Jakovčević told about the financial position of the company, stressing that, in the previous two years, HEP had achieved an enormously large net profit, and that, without clear plans for further investments or a regional expansion through acquisitions, recapitalization is not necessary. HEP has retained 87% of electricity market, and the share of its own capital has been increased from 57% in 2013 to 62%, which is much above the average of the competing companies, such as RWE. Jakovčević wondered why HEP had lowered the value of thermal power plants by 2.38 billion kunas precisely now, although there might have also been conditions for this in the previous years. For, if a company’s assets are reduced, its book i.e. market value is also lowered. He concluded that the company had not prepared a project analysis on transfer prices, and the transfer prices applied by HEP were non-market prices, so the profitable units were financing the non-profitable activities favoring certain parts of the group. Anyway, the economists believe that we should very much beware of the “Ina case”, because HEP is the only remaining largest and highest-quality Croatian state company. “We should remember the year 2007, when the then government sold the shares of the Croatian Telekom to the people in the pre-election period. Everybody was happy, the then government gained political points for the elections, but where is the Croatian Telekom today?”, Lovrinčević asked himself, adding that HEP was a company the value of which represented 10% of the GDP, so that it should serve to start the economy.

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