Elektrilevi split analysis: Biggest risk is Eesti Energia loans

Eesti Energia.
Eesti Energia. Source: Siim Lõvi /ERR

According to an analysis conducted by KPMG, the much-discussed separation of Elektrilevi from Eesti Energia would cost the latter millions of euros. Most of those additional costs would be needed to cover interest on Eesti Energia's unpaid loans, as well as a restructuring of the company's loan portfolio. KPMG also assessed the potential impact of a merger between Elektrilevi and Elering.

KPMG's analysis found, that the separation of Elektrilevi would have a negative impact on the operations of Enefit Connect and the financing of Eesti Energia's activities. In other words, the move would cause sustainability and development issues for both companies.

One positive effect of the separation however, would be the elimination of potential risks of conflicts of interest, which may arise as a result of the electricity generator (Eesti Energia) being part of the same group of companies as the network distributor (Elektrilevi).

The most positive effect on the electricity market, which may result from the restructuring is the expected creation of an interconnected electricity transmission system operator (comprising both Elektrilevi and Elering). This should, in particular, improve the interconnection of the electricity transmission system and network development processes.

From a financial perspective, the study highlighted that there are two main challenges, which would result from Elektrilevi's separation from Eesti Energia. First, the need for Eesti Energia to refinance its loans, and second, the company's post-separation financing capacity.

According to the analysis, Eesti Energia's loan portfolio would need to be refinanced to the tune of €450 million. "It may be difficult for Eesti Energia to raise this amount of financing after the separation of Elektrilevi, so additional funds would be necessary, along with equity (or state - ed.) contributions," the analysis states.

"It is likely that Eesti Energia's rating will fall after the divestment of the low-risk distribution network service and that the cost of its debt capital will rise," KPMG points out in the analysis.

Overall, the restructuring will involve some additional costs, however, according to the study, they are not on a scale that should affect the implementation of the restructuring plan.

The changes brought about as a result of the restructuring may also have an impact on electricity tariffs, with the study noting that such changes are likely to be permanent or recurring.

According to the analysis, in the first year after the separation, the average tariff would be expected to rise by around 1.5 percent, with the rate of increase only set to fall below one percent in year 33.

The analysis showed, that the separation of Elektrilevi from Eesti Energia will increase costs by €2.5 million per year, while investment costs will fall by €3 million.

One-off costs of €2.3 million would also arise from loan restructuring and consultations.

The study additionally found, that Eesti Energia would incur €4.3 million in interest costs on outstanding loans as a result of the split, of which €3.54 million would be for an unlimited period.

Head of Eesti Energia Hando Sutter, has previously said that the group's net debt is around €1 billion. Sutter also said, that the separation of one company from the group would mean the need to negotiate with banks to restructure its current the loan portfolio.

In that case, the most difficult task would be obtaining a loan for Enefit Power, which produces electricity from oil shale. However, as borrowing has become more expensive in general, and in light of the difficulties involved borrowing to fund oil shale power generation, refinancing would have a significant impact on the group as a whole.

The government discussed KPMG's analysis at a meeting on Thursday. During a press conference on the same day, Prime Minister Kaja Kallas (Reform), who has been one of the leading voices calling for Elektrilevi to separate from Eesti Energia, said the decision about the separation would not be made by the current government.

KPMG analyzed the potential impact of separating the distribution network (Elektrilevi) from Eesti Energia. The study also assessed Elektrilevi's possible integration with transmission network Elering. The analysis was based on data related to the economic performance of Eesti Energia Group, Elektrilevi and Elering.

The analysis also assessed, the financial, legal and technical feasibility of the potential separation. KPMG's study did not address how the separation from Eesti Energia and potential merger with Elering would happen in regard to commercial law.

New system operator would have to be created

If Elektrilevi were to merge with electricity transmission system operator Elering, it would be an interconnected system operator. However, this would create the need for a separate, independent system operator to then be established.

This would be of particular importance if, as has long been discussed, the combined Elektrilevi- Elering company were to be listed on the stock exchange.


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Editor: Michael Cole

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