ČEZ is world’s most profitable energy company

Some call firm “a monopoly,” others say innovative integrated network keeps costs low

The average shareholder return on ČEZ shares over the past five years is 43.9 percent.

Czech energy company ČEZ is the world’s most profitable energy producer, according to a new report that puts the company among an elite. The company has been able to continue posting record profits despite an economic downturn, an even more impressive feat given the company is less than 20 years old. But critics say the phenomenal profits come at a price, hurting fair competition at home and damaging the Czech Republic’s reputation.

According to Boston Consulting’s study published last week, ČEZ has, over the past five years, earned its shareholders more profits than any other energy company in the world. The study ranked ČEZ ninth out of all companies in the survey, which sampled businesses in sectors from electronics to food service. The average total shareholder return on ČEZ shares over the past five years has been 43.9 percent, putting ČEZ among an “elite group of sustainable value creators that have generated sizable and sustainable shareholder returns over a decade,” according to the study.

ČEZ has undergone phenomenal growth since it was founded in 1992, but the past decade has been most successful, thanks in large part to increasing energy prices and the company’s strategic investments domestically and in neighboring countries. The Temelín nuclear power plant and a recently constructed wind farm in Romania are two of the company’s most recent projects. The company’s stock prices have skyrocketed from 100 Kč per share in 2004 to a high of 1,400 Kč in 2007 before leveling off to around 900 Kč per share this year. ČEZ spokeswoman Eva Nováková said the company plans to continue expanding.

“ČEZ’s vision is to be the leader in the power markets in Central and Southeast Europe,” she said.

ČEZ was formed in 1992 with the conversion of a state-owned energy producer into a privatized company. Even after privatization, however, the state kept a two-thirds stake in the company, allowing the government to play an active – and controversial – role in its success. ČEZ’s first major project was the construction of the Temelín power plant in south Bohemia. At the same time, ČEZ began buying majority shares of several smaller energy companies, which detractors say has made it a monopoly on the Czech energy market.

Weston Stacey, executive director of the American Chamber of Commerce, called ČEZ “a monopoly by any legal or economic definition,” adding, “From what I have read and heard here and abroad, ČEZ is hurting the country’s reputation.”

“I think people are beginning to associate the executive pay packages at ČEZ with their higher energy rates and wonder why politicians have agreed with such a reverse Robin Hood policy,” he said. “I suspect the pictures from Tuscany were just appetizers: ČEZ’s role in politics shows all signs of becoming a major election issue.”

Not everyone agrees ČEZ is an obvious monopoly, however. Jarmila Lehnerová, spokeswoman for the Czech Energy Regulatory Commission, dismissed such accusations.

“The Czech electricity market is fully open and respects all the conditions provided by EU legislation,” she said. “Under the terms of the current legislation, ČEZ has no advantage over other participants in the electricity market.”

One major key to ČEZ’s success is its ability to provide its own integrated set of power sources, meaning it can offer energy at lower prices, said Petr Novák, energy sector analyst at Atlantik FT. In addition, the company operates in a regulatory environment that is relatively lenient, he said.

“ČEZ owns two nuclear power plants, which means lower operating costs, and coal mines, which means its coal prices are about 60 percent lower,” he said.

Low prices have attracted customers and investors throughout Europe, allowing ČEZ to continue expanding its production capacity without raising costs, according to Marek Hatlapatka, analyst at Cyrrus.

“ČEZ produces energy comparatively cheaply, but can sell energy at pan-European prices,” he said. “ČEZ’s margins stand at almost 50 percent, while most West European energy companies have only about 20 percent.”

ČEZ may owe its success to its ability to produce nuclear and coal energy, but it is clear the company needs to move in new directions. The European Union plans to cut its collective CO2 output 20 percent by the year 2020, making renewable energy sources a profitable – and necessary – investment. Nováková said the heightened interest in renewable energy has changed the way ČEZ sees its future.

“As a matter of course, we also focus on the renewable sector. But ČEZ aims beyond the simple use of renewable sources,” she said. “Our new strategic initiative – an extension of ČEZ activities in the “new energies” area – consists firstly of supporting R&D and using new technologies in the production, distribution and consumption of electricity, which aim to reduce the company’s environmental footprint.”

Until now, both domestic and international investors have considered ČEZ a very secure investment, but that may be changing, according to Hatlapatka. The Czech energy sector has developed so significantly in the past decade that investors looking for growth potential may look elsewhere, he said.

“The Czech energy market is divided into big players, so there aren’t many opportunities to invest in some big share in the sector. If foreign investors are looking for opportunities to gain market share, there are more attractive countries,” he said. “In Poland, electricity prices are 15 percent or 20 percent lower than in the Czech Republic or Germany, so their potential growth is much larger than the Czech Republic.”

– Petr Cibulka Jr. contributed to this report.

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