Slovakia Suffering 7-Year Itch Weighs Cost of Enel Divorce

Slovakia’s relationship with Enel SpA (ENEL) is suffering from the seven-year itch.

After promises broken, plans delayed and finances strained, the main question is whether it can afford the divorce.

Things came to a head in May, when the government rejected Enel’s demand for an extra 800 million euros ($1 billion) to pay for a nuclear plant it was supposed to finish this year. The 440-megawatt reactors it agreed to build after buying two-thirds of the state power utility in 2006 are 1 billion euros over budget and won’t be ready until at least the end of 2014.

Premier Robert Fico’s cabinet approved only an emergency 260 million euros to finish the two Soviet-designed reactors at the Mochovce plant, while hinting at irreconcilable differences.

“It would do no harm if some Slovak companies were majority-owned and managed by the state,” Economy Minister Tomas Malatinsky told Bloomberg News in an interview yesterday. “The question remains whether we can afford it.”

The state’s ambition may be frustrated by its own laws and budget constraints. Public debt to gross domestic product is already expected to rise to within 1 percentage point of a level that triggers automatic spending curbs under the law.

While Slovakia, which Moody’s Investors Service rates at its sixth-best investment grade, has the capacity to raise the funds, the additional debt may push it above the legal limit, according to Maria Valachyova, an economist at Slovenska Sporitelna AS, a unit of Erste Group Bank AG, in Bratislava.

Spending Limits

“The government can’t afford to do it as it needs to keep public debt below the level that would trigger strict spending limits,” Valachyova said by phone yesterday.

Public debt will grow to 54.3 percent of GDP in 2014 from 52.1 percent this year, according to the budget, which is yet to be passed by parliament. Exceeding the 55 percent limit would activate a spending freeze, while the government is obliged to pass a balanced budget once debt reaches 57 percent of GDP.

The country, which needs to roll over 4.3 billion euros of debt next year, must also abide by a European Union debt ceiling of 60 percent as it adopted the euro in 2009.

Government efforts to squeeze its budget deficit below an EU limit of 3 percent of GDP have helped keep borrowing costs low, with 10-year euro-denominated bonds yielding 2.6 percent, or about 80 basis points over similar-maturity German bunds.

State Control

Still, Slovakia has inched toward greater state control of the country’s energy assets. Fico’s cabinet agreed to buy back a stake in gas provider Slovensky Plynarensky Priemysel this year from EON SE and GDF Suez (GSZ) SA to curb rising retail prices. It’s also taking sideways glances at neighbors like the Czech Republic, owner of 70 percent of utility CEZ AS, and Hungary, which paid $1.3 billion for EON’s gas operations in the country.

“The Slovak state needs to think about its energy strategy, whether to actively re-enter the utility like the Hungarians,” Malatinsky said. “The time is getting ripe.”

Hungary has outlined plans to buy as many as seven utility companies, control all gas storage plants and make the household energy industry a state-owned, nonprofit operation.

There may be gains for Slovakia in wresting control over prices for consumers, employment at facilities, and a steady stream of income from setting dividend policy. CEZ is the biggest corporate contributor to the Czech Republic’s coffers.

Fico, like leaders across Europe, has attacked utilities for raising the cost of living, while his administration has imposed tax surcharges on energy companies. He also criticized sales of state companies, including the deal handing Slovenske Elektrarne AS to Enel under his predecessor Mikulas Dzurinda.

Honeymoon Over

For Rome-based Enel, the honeymoon may also be over.

Plans to counter weak demand in the company’s main Italian and Spanish markets by selling power from the Slovak reactors to eastern Europe crashed with the tsunami that destroyed Japan’s Fukushima reactors and inflated nuclear-safety costs worldwide.

Now the company, which became Europe’s most-indebted power producer after buying Spain’s Endesa SA in 2007, is planning 6 billion euros of asset sales through 2017 to cut borrowings.

“We see Slovenske Elektrarne as the ideal candidate for disposal given its capital intensity and the fact that the relationship between the Slovak government and Enel has significantly deteriorated,” said Manuel Palomo, an Exane BNP Paribas utilities analyst in Madrid who rates the Italian company an underperform. “The combination of poor fundamentals and political risk makes the unit unattractive to Enel.”

Enel shares rose 0.5 percent to 3.32 euros at 9:58 a.m. in Milan. The stock has risen 43 percent since reaching a 2013 low of 2.304 euros on July 12.

Aging Fleet

The utility, which declined to comment when contacted by Bloomberg News, has two older reactors at Mochovce and two at Jaslovske Bohunice through its Slovak unit. It owns hydropower and an aging fleet of unprofitable Slovak coal-fired plants, with total installed capacity of 5.7 gigawatts as of 2012.

When Enel bought its 66 percent for 840 million euros, it expected to complete Mochovce this year and invest 2.8 billion euros. Now it says that will be at least 3.8 billion euros and work won’t be finished until the end of 2014 at the earliest.

“The government is doubtful that even those dates are achievable and that the proposed budget increase will be sufficient,” Malatinsky said in the interview. “Enel should already guarantee a final date and final price.”

To contact the reporters on this story: Ladka Bauerova in Prague at lbauerova@bloomberg.net; Radoslav Tomek in Bratislava, Slovakia at rtomek@bloomberg.net

To contact the editors responsible for this story: Will Kennedy at wkennedy3@bloomberg.net; James M. Gomez at jagomez@bloomberg.net

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