Cut to ČEZ's bond ratings

Despite outperforming negative forecasts, ČEZ's bond rating was still pushed down by factors economists say are essentially beyond the company's control.

Standard & Poor's downgraded the state-owned energy company's credit rating from an A- to a BBB+ primarily based on forecasts of continued low electricity prices and the lingering hangover from a recent period of heavy investments and acquisitions, which the ratings report acknowledged had been reduced significantly in recent months but still "eroded ČEZ's headroom" because of the rising debt levels associated with that period.

"The amount of debt they have [affects] the investments they make in the future, so it is a risk to investors," Next Finance researcher Ivona Hrušová told The Prague Post.

The downgraded rating was also based on the potential auctioning of carbon credits, which the government is now considering as a way to raise money to pay off subsidies for renewable energy while keeping consumer electricity prices steady.

"All the factors influencing the company are not the fault of the company," Hrušová said. "It's all external factors."

ČEZ experienced a double-digit decline in net profit in the first half of 2010 as market power prices fell. In that same period, the company continued to invest in plant renewals and upgrades and in the expansion of the photovoltaic sector. Those events are expected to generate substantial negative discretionary cash flows through 2012, which means ČEZ will not have extra money to pay cash dividends, repurchase common stock or retire debt.

ČEZ announced along with its third-quarter results Nov. 9 a "New Vision" cost-cutting plan, which will cut 78 billion Kč ($4.4 billion), or 21 percent, from its 2010-14 investment plan and will reduce foreign projects to consolidate itself on the domestic market.

In the first three quarters of 2010, the company's net profit fell 7.1 billion Kč to 40.2 billion Kč.

The report said the company's long-term outlook is stable, as ČEZ "will be able to maintain its market position and deliver operational performance," but the risks for increased pressure on the rating far outweigh any likelihood that the ratings will recover in the near future.

Future risk factors include weaker market conditions and acquisition-driven growth on the company's part, but factors like lower carbon dioxide allowances than the ratings accounted for remain mostly in the hands of politicians.

"In addition, any future signs of increased political risks - for example, policies that aim to extract cash from power utilities in the Czech Republic - could have adverse implications for ČEZ's credit quality," the report said.

Cat Contiguglia can be reached at
ccontiguglia@praguepost.com