Investment Daily, December 21, 2012

Ministry of Finance borrows RON 3.4 bn through the issuance of 3-year T-bonds; Fondul Proprietatea – Regulation for valuing companies in insolvency approved; OMV Petrom – Regulator set the price for the energy sold in 2013 on the regulated market; Fondul Proprietatea – ANRE approved the regulated prices for the energy generators; OMV Petrom and Expert Petroleum enter partnership for production enhancement; Moody’s downgraded Transelectrica to Ba2

In the news

Ministry of Finance borrows RON 3.4 bn through the issuance of 3-year T-bonds
Yesterday, the Ministry of Finance borrowed approx. RON 3.4 bn through the issuance of 3-year T-bonds, some 11x above the initial intended amount. The average yield paid stood at 6.14%, which compares favourable to the average yield of 6.61% paid at the last similar auction at the end of November, when the ministry borrowed RON 350 mn. Demand for RON government debt securities improved after the elections (both in volume and yields) apparently given a revival of non-residents’ appetite for Romanian instruments.

Fondul Proprietatea – Regulation for valuing companies in insolvency approved
Securities Commission (CNVM) has approved a regulation which changes the way companies in insolvency procedure are valued when computing Fondul Proprietatea’s (FP) and SIFs’ NAV. Such companies could be valued at either zero or at a value assigned by an independent valuator. Until now companies in insolvency were automatically valued at zero. We remind that FP is not allowed to pay dividends as long as its official NAV for end of the year is below the value of its share capital. After Hidroelectrica’s insolvency FP’s NAV has dropped below the value of its share capital. As of November 2012, FP’s NAV was RON 12.8 bn while its share capital was RON 13.8. This means that Hidroelectrica's total equity should be valued at a minimum value of RON 5 bn which in our opinion does not imply a too stretched value. The regulation will come into force after its publication in the Official Gazette.

FP needs to apply this methodology for its December NAV to be allowed to pay dividends. Moreover, the regulator changed the way unitary NAV is computed. Thus, total NAV will be divided by the number of issued shares less the number of treasury shares. Since FP was not able to cancel the shares from the first buy-back program, this will add sever percentage points to the official NAV per share. Despite the fact that the regulation for valuing companies in insolvency was announced several weeks ago we view it as positive for FP share since in increases the odds for dividends payment.

OMV Petrom – Regulator set the price for the energy sold in 2013 on the regulated market
According to the media, citing the chief of the regulator in the energy sector (ANRE), the entity approved the prices to be paid to producers for the energy sold on the regulated market. The price to be paid by Petrom in 2013 stands at 169 RON/MWh, which is some 24% lower than the price it obtained so far on the centralized market for bilateral contracts. We estimated for 2013 an average price of 211 RON/MWh, which could be achieved if less than 30% of the energy produced is sold on the regulated market (which we believe is the case). So we see the news as neutral.

Fondul Proprietatea – ANRE approved the regulated prices for the energy generators
According to media, ANRE, the energy market regulator, has approved the prices for the regulated market for energy producers, many of them having Fondul Proprietatea (FP) as a minority shareholder. Thus, Hidroelectrica will sell the energy on this market segment in 2013 at a price of RON 125/MWh, meaning a huge increase of almost 73% yoy. Hidroelectrica’s insolvency and the vocal judicial administrator might be a reason for this significant increase. Nuclearelectrica will get an increase of 14% yoy to RON 142/MWh. And finally, the thermo producer CE Oltenia will sell the on the regulated market at a price of RON 190/MWh, up 9% yoy. Nevertheless, according to our info split on the three producers which were merged into CE Oltenia, the average regulated price for this new producer was already around RON 190/MWh. We rate this piece of news as neutral for FP shares since while the increase for Hidroelectrica is significant, the one for CE Oltenia is modest and will not be able to cover the large jump in costs in 2013. We remind that starting 2013 CE Oltenia will no longer receive free allocations of CO2 certificates to cover its emissions.

OMV Petrom and Expert Petroleum enter partnership for production enhancement
OMV Petrom signed a 15-year agreement with Expert Petroleum for production enhancement services on 13 small mature fields (currently producing around 2,400 boe/d), some of them exploited for more than 40 years, situated in the Western part of Romania, nearby Timisoara.
Expert Petroleum will take over and finance the operations and OMV Petrom employees engaged in these activities will be transferred to Expert Petroleum. OMV Petrom will remain the sole titleholder of the concession contracts and the owner of the hydrocarbon production, the existing assets as well as of the rights and obligations as defined by the Petroleum Act. OMV Petrom will supervise the operations and will remunerate Expert Petroleum based on a services fee, which will vary depending on the production level delivered.

The current production of the fields accounts for 1.5% of the daily production of OMV Petrom in Romania, with production costs substantially higher compared to the average production costs of the company.
The contract targets an increase of cumulative oil and gas production above estimated natural decline. We do not expect a significant impact on production resulting from the partnership but still the news is positive.

Moody’s downgraded Transelectrica to Ba2
Transelectrica informed that Moody’s downgraded its rating by one notch from Ba1 to Ba2 with negative outlook. The decision comes after a previous downgrade from Baa3 (investment grade) to Ba1 (not prime) in July 2012.
The present downgrade took into account the company’s weak liquidity, the inadequate financing structure and the reliance on short term debt. The negative outlook reflects the risk related to support expectations from the Romanian government.
The outlook could turn stable with an improvement in the outlook of the sovereign rating, or the company’s financing structure and the implementation of a strategy to diminish the FX risk and its impact on the company’s results.
We see the news as negative as it could have a negative impact on the financing costs of the company.

Find the full report in the attached pdf document