First German Municipal Utility Holding to File for Insolvency

The German municipal utility Stadtwerke Gera AG filed for insolvency on 27 June 2014. According to press reports it is the first Stadtwerk to take this step, albeit it is wholly owned by the Eastern German town of Gera which is its sole shareholder and with approximately 100,000 citizens the 3rd-largest city of the Central German state of Thuringia . On the 3rd of July also two of its subsidiaries went into administration, the public transportation enterprise Gerarer Verkehrsbetriebe GmbH and Flugbetriebsgesellschaft mbH Gera which operates the municipal airport.

Stadtwerke Gera AG is the holding company of seven subsidiaries in which the city of Gera combines its municipal undertakings. They are responsible for energy supply (power, gas and district heating), the distribution grid, generation of heat and power, waste management, public transport and council housing. While Stadtwerke Gera AG is the sole shareholder of most subsidiaries, some of theses subsidiaries have prominent international minority shareholders, being Veolia for the local waste management company GERAER Umweltdienste GmbH  Co. KG, and GDF Suez for the operator of the local gas-fired CCGT heating and power generation plant and a gas-fired peaking heat generation plant, Kraftwerke Gera GmbH, and the local of natural gas, power and district heating supplier, Energieversorgung Gera GmbH, whose subsidiary GeraNetz GmbH operates the respective distribution systems.

The main reasons for the insolvency of Stadtwerke Gera allegedly are (according to an article published by Handelsblatt on 1 July 2014, p 21) a miscalculation of the power production and a special amortization for the gas-fired power plants with an amount of EUR 18m which is owned by Stadtwerke Gera (and only operated by Kraftwerke Gera Gmbh). The background for this seems to be that revenues have sharply declined due to low power market prices over an increasing amount of hours due to the feed-in of renewables in the German system which have imposed severe pressures on margins of power plants from fossile fuels in general and from natural gas in particular. In addition to that migration within the country and demographic change in the new eastern states of Germany plaid a major role resulting in a situation that has already been increasingly difficult for a couple of years for Stadtwerke Gera AG.

Municipal holding companies are often used to cross-finance their subsidiaries by using the profits of certain activities, usually in particular in the energy sector, to subsidize loss-making public transportation and other utilities, thereby saving on corporate taxes. In Gera the income of the energy business has already decreased since 2006. Due to this and other developments already for years the losses in particular of the public transportation company could not be financially offset any more, at least not in full. However, still the domination agreement and profit transfer agreement required that the holding company compensates its subsidiaries for theses losses.

At the very end, Stadtwerke Gera AG would have needed EUR 30m from the town of Gera to help the municipal utility out, which the city could not grant for budget control reasons, and thus required Stadtwerke Gera to file for insolvency.

As a consequence of this, in particular also the public transportation company, Geraer Verkehrsbetriebe GmbH,  had to file for insolvency, as they could not expect any further compensation payments from the holding company Stadtwerke Gera. Public transportation was loss-making already since years and it had become more and more difficult to cover these losses from the declining earnings of the energy business. In contrast, the other municipal utilities active in the energy sector report to be operating profitably and able to continue their business. As regards the operator of the gas-fired combined cycle heating and power plant and the peaking plant, Kraftwerke Gera GmbH, no details are available.

On 16 July 2014, the Governor and the Minister of Finance of the State of Thuringia met with the major of the city of Gera to discuss options to resolve the situation and assist the city in the continuation of operation of public transport, which has not yet been effected, as well as to resolve the situation, possibly also by granting additional funds to the city (but not directly to Stadtwerke Gera AG) .

The Verband kommunaler Unternehmen (VKU), the leading German association of municipal businesses, stated that it is an exceptional case that a municipal utility became insolvent, but declined to comment on the concrete case (Handelsblatt, 01 July 2014, p 21).

In 2005 the municipal utility in Cottbus had been in a similar situation. At that time the reason was a failure-prone brown and oversized lignite-fired cogeneration facility. Following intense negotiations, the municipal utility was able to avoid bankruptcy of the utility as the utilities’ main creditor, Deutsche Kreditbank AG (“DKB”), acquired 75% of the shares.

Sources:  Stadtwerke Gera, Ostthüringer Zeitung

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