Bulgaria sparks a headache for ČEZ
Company under pressure as its problems in the Balkans start to spread
Posted: February 20, 2013
A riot policeman holds up his shield Feb. 17 to protect himself from a stone thrown by a demonstrator during clashes in front of the headquarters of Czech power producer ČEZ in downtown Sofia, Bulgaria. The protesters threw rocks, firecrackers, bottles, eggs and tomatoes at the police line manning the energy company's building and the president's office to protest against sky-high January electricity bills in the European Union's poorest country, as the government drags its feet on liberalizing the energy market.
On the heels of street protests and denunciations from politicians, ČEZ saw its spiraling crisis in Bulgaria come to a head Feb. 19 when the government there removed the company's electricity distribution license.
The authorities took the license away over alleged breaches of procurement rules, following angry complaints among consumers over increases in their energy bills.
Bulgaria's prime minister, Boyko Borisov, promised price cuts in electricity as he announced the license removal, although ČEZ described the move against it as "a serious breach" of the country's laws.
"The only authority that has the power to make a decision to start the procedure of license revoking is the independent energy regulatory office," a company statement quoted by media said.
ČEZ has denied the Bulgarian authorities' assertion of a "systematic violation" of public procurement rules in its dealings with subcontractors.
Protests against ČEZ and the two other foreign energy companies that, like the Czech utility, have electricity distribution operations in the country, were held across Bulgaria Feb. 17, and there was no shortage of participants.
The streets of the capital Sofia were bursting with as many as 12,000 demonstrators, thousands of whom later tried to march on ČEZ's local headquarters before police intervened.
The situation in Bulgaria, a country that accounted for nearly 10 percent of ČEZ's revenues in 2011, offers an uncomfortable echo of another wave of foreign turmoil the company has faced in recent months: In Albania, ČEZ's power distribution operation has been engulfed by a crisis no less severe. There, ČEZ Shpërndarje has been nationalized amid scorn from lawmakers and regulators alike over its failure to stem losses from the national grid. The losses have been financial as well, with the company falling into the red in Albania in 2012 after two years of profits.
The heady days of the mid- to late-2000s, when ČEZ was cutting a swath across Central and Eastern Europe with its acquisitions, and when its international ambitions stretched as far afield as Russia, seem increasingly distant. It is a stark reminder of what the ratings agency Standard and Poor's described in a recent report as "the company's exposure to higher-risk European markets."
The agency seemed to acknowledge a tendency for ill-advised purchases when it suggested the company would be better off if it "continued to focus on its core domestic business and refrained from opportunistic acquisitions."
These countries throw up hurdles, such as large state-owned entities that fail to pay their bills, that simply do not exist in Western Europe. More broadly, farther east the energy industry tends to be subject to a far greater degree of political influence.
"The companies have to cope with totally different challenges than in Western Europe," says Jan Osička, an energy policy researcher at the International Institute of Political Science of Masaryk University. "In Eastern Europe, you have to pay so much more attention to what the government thinks and who is waiting in opposition to become government people. In Western Europe, you follow the elections only to see what the taxes will be."
Issues of this nature were not enough to put off ČEZ when it set about buying up overseas assets in 2005. Since then, it has invested 72 billion Kč abroad, about 20 percent of its total investments over that time.
Among a series of purchases, the company secured a majority share in an electricity distribution company in Romania and three in Bulgaria in 2005, which were later merged, bought majority stakes in power companies in Poland in 2006 and set up a joint venture in Turkey in 2008. Its fateful acquisition of a majority share in the Albanian electricity distributor took place in 2009.
ČEZ, which is majority-owned by the Czech government, now has interests of varying size, mostly linked to power generation, distribution or trading, in Albania, Bulgaria, Hungary, Germany, the Netherlands, Poland, Romania, Slovakia and Turkey, with other minor interests in Bosnia and Herzegovina, Cyprus and Serbia.
In Bulgaria, other interests include a coal-fired power station and a solar power plant launched in 2012, while among the assets in Poland are majority stakes in two coal-fired power plants. The company's electricity distribution company in Turkey has 1.3 million customers.
Some observers believe ČEZ was simply too ambitious in its buying spree several years ago.
"They overexpanded. I think before the crisis … they were simply overoptimistic," says Ana Otilia Nutu, a Romania-based senior policy analyst in energy and infrastructure with Candole Partners. "When countries like Romania and Bulgaria became members of the European Union, things were looking very bright. They were the good years of high economic growth just before the crisis."
Since the global financial crisis, ČEZ has focused on consolidating its operations at home, with the building of two additional reactors at the Temelín nuclear power plant in south Bohemia more of a priority than international expansion, with the possible exception of the alternative energy sector.
Indeed, ČEZ has already pulled out of projects that would have seen its international reach grow considerably.
It withdrew from plans from 2007 to build three gas-fired power plant units in northern Moscow, with Chinese investors now pressing ahead with the project instead, and it was the first of a series of foreign investors to pull out of a proposal for two more reactors at a Romanian nuclear power plant.
ČEZ looked into offloading its interests in Turkey, although ultimately it did not do so, and this year has taken steps toward giving up involvement in the building of two reactors at the Jaslovské Bohunice nuclear plant in Slovakia, with Russian interests set to take ČEZ's place.
Key foreign priorities more recently have instead been in alternative energy, notably wind power. In 2011, in Poland, for example, the company bought 67 percent of Eco-Wind Construction, a wind-park developer with 700 megawatts (MW) worth of power output under development. Last year, ČEZ slightly increased its stake in the company.
It also owns the developer of the 600 MW Fântânele-Cogealac wind park in Romania, which with its 240 wind turbines is the largest onshore wind farm in Europe. It became fully operational at the end of last year.
"We have a very generous bonus scheme [for wind power in Romania], and there are a lot of speculative investments. It's very profitable, so it's a priority not to withdraw from something very profitable," Nutu says.
When publishing its most recent results, for the first three quarters of 2012, ČEZ Group said the "growing volume of energy generated by Romanian wind parks" was a key factor behind its increased profits, with operating profit growing 8 percent year on year to 162.5 billion Kč and net profit up 27 percent to 33.4 billion Kč.
Yet the partnership with Romania has not been without its problems. ČEZ's electricity distribution business there, one of its first purchases, dating to 2005, has had to deal with state entities that have not paid the money they owe for energy.
One of the chief sinners is the state-owned railway operator, which accounts for a significant slice of the electricity the company distributes, but pays only intermittently. Yet the difficulties pale compared with those in Albania, where ČEZ has been unable to turn a profit because of electricity theft from the grid and the widespread failure of companies and organizations to settle bills.
Overall, ČEZ's distribution operation in Romania is "quite OK," Nutu says, despite the uncertain payment situation, with the regulator possibly offering the company more flexibility in setting tariffs for consumers. "Distribution is fully regulated so their profits are quite OK; they're allowed to recover some amounts from increased tariffs," she says.
In Bulgaria, analysts suggest ČEZ's situation is, at least financially, closer to the position in Romania rather than Albania. The problems have been more of a political nature.
"It's rather a misunderstanding. The people, their monthly bill jumped maybe 50 percent, but next month their bills will be much lower. ... There are no financial problems," said Petr Bártek, an energy analyst at Erste Group Bank A, in comments made before it was announced ČEZ was being stripped of its Bulgarian license.
Many analysts share the opinion advanced by ČEZ that taken together the company's investments outside the Czech Republic, the result largely of the work of previous CEO Martin Roman rather than incumbent Daniel Beneš, have done well.
"You can evaluate the overall foreign/overseas investments of ČEZ as successful. ČEZ is the largest energy group in Central and Southeast Europe," says Lukáš Tichý, an energy analyst and research fellow at the Institute of International Relations in Prague.
The company points out its foreign acquisitions are major contributors to its vast profits, with spokeswoman Barbora Půlpánová saying profit from foreign acquisitions totals 55.9 billion Kč or 5,300 Kč per Czech citizen. Půlpánová also said ČEZ's market capitalization increased by more than 550 percent during its expansion phase.
"Nevertheless, ČEZ's approach to foreign acquisitions was always conservative, so we were examining each investment very thoroughly," she said. "Purchase prices per customer in privatizations of Central and Eastern Europe distribution companies were much lower compared with other companies. In general, ČEZ Group's acquisitions abroad perform significantly better than the international average."
In a statement released in October, Tomáš Pleskač, distribution and foreign assets division director, said the foreign division has provided 8.8 billion Kč in dividends and planned to distribute a further 1.3 billion Kč by the end of 2012.
The company says it has recouped 71 percent of its foreign investments, with Albania being the only country where investments have not achieved the planned returns. The company notes the Albanian investment, sometimes seen by observers as an opportunistic purchase made because the price was relatively low, represents less than 1 percent of the total amount ČEZ invested between 2005 and 2011.
In keeping with what ČEZ describes as its aim overseas of focusing "in particular on investing in renewable energy sources," it has plans to invest in a biomass scheme in Bulgaria and wants to put 40 million euros in total into Bulgaria's renewable energy sector.
"In general, I would say they have made some good acquisitions and some bad acquisitions, as everybody does," Bártek says.
"The acquisitions of distribution assets, except Albania, were done at relatively good prices and from the long-term perspective it's solid value for the company."
With what Bártek describes as "big potential for growth" in renewables in the region, the company has opportunities for continued expansion overseas, even if its large-scale spending spree and hopes of moving into Russia and other overseas markets, including Ukraine, are over, at least for now.
Daniel Bardsley can be reached at
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