On 26 April evening, the Polish gas company PGNiG announced that Russia was stopping gas supplies to the country, and Bulgaria soon followed suit, after both countries refused to pay for gas in rubles. Despite long-term contracts, the evidence is now clear that the gas cocks can be turned off overnight.

It's not only the European countries and the European Union as a whole that find this novel situation unsettling; businesses that profit from piping the gas have also been rattled. While in Poland several gas transit companies operating the Yamal pipeline have been affected, the biggest single transporter of Russian gas into the European Union is Czech businessman Daniel Křetínský.

The possible shut-down of the gas flows directly threatens Eustream, which is owned by Křetínský’s Energy and Industrial Holding (EPH) jointly with the Slovak state. If the Russian gas supplies were to be cut off entirely, Slovakia would lose hundreds of millions of euros every year. And Daniel Křetínský would lose the business that he built his entire empire on.

Although Křetínský’s business has since branched out from energy — he owns 49% of Le Nouveau Monde, which has a stake in French daily Le Monde — it still rests on it. So how worried should he be?

Gas transit volumes are falling, so are profits

The media began writing about the real impact of the war on Křetínský’s business in early March, when the European rating agency Fitch placed Eustream in the “Rating Watch Negative” category owing to its links with Russia’s Gazprom. The downgrading sparked an especially strong reaction in Britain, where Křetínský is, among other things, the biggest shareholder of Royal Mail and part-owner besides of the West Ham United football club.

Royal Mail shares are now facing raids by speculative investment funds, and the British media, led by The Times, have begun discussing the “vulnerability” of the business of the “Czech Sphinx”, the nickname of the “mysterious” and tight-fisted businessman.

Křetínský’s own company, EP Infrastructure (EPIF), which handles gas transit and distribution in Slovakia, claims in its own defence that there is no link between its health and the sliding Royal Mail share price, since the shares are controlled by another entity — the investment fund Vesa Equity Investment. It also claims that gas shipments through Slovakia continue to ‘proceed uninterrupted’.

So far, this is true. At the beginning of March, all the same, the EPIF Group did agree, in view of the situation, temporarily to delay dividend payments and further acquisitions. Things clearly are not as the company would have liked, and they are evidently aware of the real risks.

While EPIF did make a profit last year on rising gas prices for end consumers, those profits failed to cover the shrinkage from falling transit volumes. In 2021, that was a decline of 27 percent, which confirms that EPIF’s profits largely depend on the gas transit. And, according to EPH itself, most of the gas that flows through Eustream’s pipes comes from Russia.

“The gas flows were initially skewed by the Covid crisis and, last spring and summer, by irregular deliveries from Russia,” explains Jan Osička, an energy expert at Masaryk University. Russian supplies were at the lowest they had ever been, and the reservoirs pumped up with gas from Russia remained half empty.

Whether Russia was preparing for an invasion and so deliberately pumped less gas into Europe no one can say for sure. But it is one possible explanation. In any case, shrinking transport volumes have affected the performance of Eustream and its parent company, EP Infrastructure.

Russian gas made EPH rich

Why is piping gas such a profitable business anyway? First of all, because it is — or at least was, until recently — a stable business. Simply put, a transporter makes money on contracts with suppliers who need to send gas from one point to another.

“Transport is a regulated industry. That attracts investment, because it provides returns at very little risk,” explains energy analyst Jan Osička. The volume of gas transported — specifically, the amount that companies sign up for — is what determines the profits.

Until recently, moreover, natural gas held a secure place in European energy policy plans as the answer to the question: “What comes once coal is gone?” As a component in the energy transition it was, despite criticism from the environmental movement, meant to play a key role in the transition from coal-fired power stations to greater use of renewables. But that notion is now being shaken to its foundations.

The gas transit business is now at risk because of the actions taken by individual European countries and by the EU as a whole, and not just because of Putin. Although Eustream has long-term contracts with Russian supplier Gazprom, experts agree that in a war “anything goes”, and the current stoppage of supplies to Poland and Bulgaria merely illustrates this.

If the European Union does therefore decide to stop buying Russian gas, a few contracts will not make much difference. Pressure is building in this direction, and in early April the European Parliament passed a resolution calling for a halt to the supply of Russian gas, oil, coal and nuclear fuel to Europe.

The European Commission has also declared that it wants to cut Russian gas imports by two-thirds later this year. As has now become clear, however, Russia itself may make a similar decision.

The largest independent carrier of Russian gas to the European Union is Eustream, which pipes gas to the Czech Republic, Hungary, Ukraine and Austria, from where it then flows on to other countries. One of these countries, Italy, has already announced a shift away from Russian gas and has even secured gas from Algeria to replace it.

Eustream may be left by this shift with only one transit flow — the reverse flow, through which gas has been flowing from Western markets to Ukraine since September 2014, following Russia’s annexation of Crimea. Even this volume of gas, however, has fallen over the last year and remains far from being able to compensate for the loss of revenue from transiting Russian gas.

The growth curve of Křetínský’s assets and the timeline of individual acquisitions clearly shows that the moment he entered Eustream was a crucial step for his business. Simply put, Russian gas was the goose that laid the golden eggs for EPH.

Gas transport collapse would be fatal for EPH

Eustream’s annual reports show that in 2021 the company recorded its worst results since 2013. Last year, Eustream’s EBITDA — a measure of the company’s bottom line — dropped by sixteen per cent. What would happen if Slovakia or other countries stopped taking Russian gas entirely? Note that they could do so — whether Křetínský likes it or not.

“The decision to halt gas purchases fully or partly will be a political one, and it will be taken at the level of the European Union,” sums up Karel Hirman, a Slovak energy expert who served as an energy advisor to then Prime minister Iveta Radičová and later advised Ukrainian Prime minister Volodymyr Hrojsman.

According to the banks, Eustream has so far been “less exposed to temporary fluctuations in the economic situation than other companies”, since its revenues are based primarily not on how much gas actually flows through the pipes, but on the capacity purchased in advance.

As Hirman points out, nonetheless, “Putin tossed the contracts in the bin.” The Slovak expert, whom we spoke with before the current gas supply situation with Bulgaria and Poland escalated, even leaned towards the possibility that Putin himself, who has long been trying to stir up strife in European states, might have decided to cut off supplies completely.

For the Slovak state, according to estimates by FinStat, an organisation that processes data on Slovak companies, the stoppage of Russian supplies would mean a loss of revenue of €300 million a year. Among those hardest hit would be Slovak households, which is why Slovak Prime Minister Eduard Heger has asked the EU Member States for assurances that any such steps would not hurt Slovaks more than Russia. Nonetheless, he added, Slovakia will not veto the joint sanctions.

Turning to the private transport sector, Hirman believes that the end of Russian supplies would be a significant blow to Net4Gas, the Czech pipeline operator owned by German insurer Allianz and Canadian investment fund Borealis, which Křetínský also made a bid to buy from RWE in 2013, and which also picked up a negative rating from Fitch. The same fate, Hirman also believes, would befall Eustream. Czech expert Jan Osička concurs. “Eustream would go down first,” he says, glossing the situation succinctly.

Today, Slovak Prime minister Eduard Heger has pointed out, Slovakia, as a transit country, is at the very start of the gas chain into the EU. An end to Russian gas shipments would leave it rather suddenly at the end of it. If the Slovak pipes were to stop being used for transport from Russia, they would in fact become a mere gas distribution network throughout Slovakia or possibly into Ukraine.

The consequences for EPH could prove fatal. EPH’s 2021 annual report, published in April, states that “adverse developments would significantly affect the EPH Group — its business, financial state and performance, cash flow and overall outlook”.

The hike in electricity prices “saved” EPH

And so we set out to map just how far a hypothetical bankruptcy of Eustream would threaten the entire EPH group and other of Křetínský’s assets. “One thing is the accounting impact — i.e., the impact on EPH’s consolidated results,” explains Pavol Suďa, chief analyst at FinStat . “The other is the real money that flows into its accounts from gas transportation through dividends from its subsidiaries.”

If the EU were to approve an embargo on Russian gas or if Russia itself were to stop deliveries, we can, according to him, basically scratch Eustream’s entire earnings before interest, taxes, depreciation, and amortisation (EBITDA, which indicates the company’s profitability), which contributes a hefty amount to EPH’s overall results.

Although EPH de facto holds only 49 percent of the shares in Eustream (smaller than the share of the Slovak state), it exercises managerial control. In accounting practice, this means that the consolidated results of the entire holding include the EBITDA of all of Eustream, not just the 49 percent of it.

For EPH, this has until now been a good thing. Overlooking some fluctuations, Eustream’s EBITDA has been growing, which has been boosting the health of the entire holding. If it were to fall sharply, however, the advantage would become a liability. Growth in EBITDA is a crucial indicator externally for any company, since a company that stops growing soon runs into problems, particularly when it comes to getting bank loans or repaying debts.

Although the fate of Russian gas supplies cannot be predicted, individual countries are already starting to look around for other options. Italy, for example, currently buys around 30 billion cubic metres of gas from Russia every year, the vast majority of which flows down through the Ukrainian-Slovenian corridor. The replacement gas supplies of nine billion cubic metres that Italy has now arranged with Algeria will certainly hit Eustream’s bottom lines.

Eustream is not EP Infrastructure’s sole asset, of course. The company’s other sectors — gas and electricity distribution, gas storage and heating — should largely escape any potential supply disruption. EP Power Europe recorded record revenues last year, mainly, the company says, due to the rise in commodity prices. Electricity prices alone rose threefold year-on-year between September 2020 and September 2021, boosting the profits of the holding company and stinging consumers across Europe.

Leaving aside for now the question of how acceptable it is for public policy that energy companies profit from a situation that everyone else will pay for, let’s look more closely at the consequences for Křetínský’s EPH.

No Russian gas, no EPH engine?

Asked how a complete loss of gas supplies from Russia might threaten the holding, Daniel Častvaj, spokesman for EPH, told Deník Referendum: “The gas transit segment contributes roughly ten percent of EPH’s gross operating profit. On the other hand, stopping the flow of gas would not lower profits by that same ten percent, because in that case the price of gas would go up, and so the price of electricity and the revenues of our power generation segment would increase significantly.”

Indeed, experts predict that energy commodity prices will not fall just like that. They do not agree, however, on whether and how steeply they will rise. But what is certain is that, if the EU does impose sanctions on Russian gas and oil [it has imposed them on oil imports on 4 May, Editor’s note], they will indeed climb. In that case, Křetínský’s EPPE would profit from the hike, unless political regulations are brought in to keep down revenues for energy corporations to compensate for soaring costs to the consumer.

The problem for EPH, however, is that even the growth of EP Power Europe (EPPE) has not yet been robust enough to make up for any complete loss of profits from gas transit. Although Křetínský’s company has profited from the higher electricity prices, it has also has to cover the higher input prices, which has weighed down its overall results.

Moreover, as FinStat analyst Pavol Suďa points out, the company’s consolidated result is not the only thing at stake. Like the Slovak state budget, EPH would lose hundreds of millions of euros in dividends if Russian gas were to be cut off.

FinStat has also calculated how losing the gas transit business through Slovakia will hit the Slovak state budget. The total amount included not only dividends for the state-owned company Slovenský plynárenský priemysel (SPP), but also corporate income taxes paid by SPP and its subsidiaries on their profits.

Mapping what the dividends are used for in the chain of companies through which they flow to EPH is not straightforward, according to FinStat. Three of the companies are registered in the Netherlands, making it difficult to map the flow of money through them, since information from the local registers is difficult to access.

“There are several possibilities: dividends can be paid out to shareholders, they can be invested in purchases of new assets, they can finance loans to other subsidiaries in the holding, and so on,” says Suďa, explaining the possible flow of the money EPH derives in Slovakia from its control of the gas transit. What exactly Křetínský has been using the stable profits from gas transportation for is not easy to find out. Circumstantial evidence, however, suggests that those profits finance the company’s large-scale acquisitions.

A 44-percent stake in the entire EPH holding company is held by J&T Energy Holding, with Daniel Křetínský controlling the majority stake through companies registered in Luxembourg and Cyprus. The annual reports of Luxembourg-based EP Investment S.à r.l. reveals that part of the dividends from EPH have flowed into the company in the past, but exactly which subsidiaries rendered them up cannot be determined.

Although EPH argues that the retail business is separate from gas transit, EP Investment S.à r.l. holds shares not only in EPH but also in the Vesa Equity Investment fund mentioned in the introduction. Křetínský’s entire empire is thus interconnected.

To sum up: If any single individual in the Czech Republic has a vested interest in ensuring that Europe keeps buying Russian gas, it is Daniel Křetínský. Simply put, without Russian gas, the entire EPH is in danger of becoming a car without a motor.

A public bailout?

This does not mean, though, that Křetínský and other gas corporations have played their last hand. The debate at European level today is not only about whether and when to get rid of Russian gas, but has moved on to discussing what to replace it with and what new projects to invest in - whether that’s hydrogen, which can be transported through the pipelines, or liquefied natural gas (LNG).

Experts from organisations that keep tabs on how corporations influence public policy-making also point out that the energy corporation lobby has always been very powerful at EU level. Not surprisingly then, Křetínský may try to save his company with EU funds.

Whatever happens, the peaceful era of enormous and stable revenues from the transit of Russian gas through Slovakia seems to be over.

Original article was published in Deník Referendum in Czech in April 2022. This English version was published originally by Voxeurop in May 2022.