ČEZ IS ONE OF A FEW LARGE ENERGY COMPANIES THAT IS STILL MAKING MONEY. BUT ITS PROFIT IS DECLINING TOO, AS THE PRICE OF ELECTRICITY DECLINES. THE MAIN REASONS ARE THE LOW PRICES OF COMMODITIES, ESPECIALLY OIL, AND THE SITUATION WITH SUBSIDIZED ENERGY SOURCES. THESE ARE REVOLUTIONARY CHANGES, SAYS DANIEL BENEŠ. (Interview for Hospodarske noviny)
For the sixth consecutive year, Daniel Beneš heads the largest Czech energy firm.
Over that period, the price of electricity has fallen sharply on markets, which has also reduced earnings for ČEZ. Nonetheless, the company is still making money. 'Since 2012 we have been the only large energy firm whose rating has not been lowered,' Beneš says. And he emphasizes that the good results can be attributed to careful investments and one of the lowest debt levels compared to competitors of similar size.
* HN: ČEZ has managed to maintain solid profits, but your outlooks for this year are no longer so optimistic. Instead of last year's figure of nearly CZK 28 billion, this year you expect to make only CZK 18 billion.
This number is of course worse than the profits in the past. But when you look at the development of the prices of electricity, it is surprising that we are making any profit at all. Our competitors are all making losses and are not managing the situation. E. ON is nearly CZK 190 billion in the red, Vattenfall is CZK 57 billion in the red, and RWE is more than CZK 5 billion in the red. And unlike us, almost no one pays dividends. In comparison, I consider our gross profit before depreciation of CZK 60 billion and net profit of CZK 18 billion to be good. We are working hard on it.
* HN: Is there a risk that ČEZ will suffer losses in the future?
Under certain circumstances it is possible. The energy sector is changing in a revolutionary way, and this is happening quickly, regardless of the life cycle of power plants. Large market players have invested in resources that are not yielding as high profits as had been expected, when decisions about construction were made. If the nuclear power plants in Germany will be closed, then it will be difficult for them to make money, and their value will need to be reappraised. The same applies, for example, to coal power plants that are in the first half of their life and almost brand new. No one is doing anything to resolve this situation. However, energy needs long-term stability, because achieving returns on investments takes a long time. Another factor is the price of electricity, which hovers at around EUR 20 per megawatt hour. In a year it has fallen by EUR 11, which is a crazy number that influences companies' financial health. This is the result of energy from renewable sources, the price of which is not created by the market, but is subsidized. The market for traditional power plants is therefore shrinking even more. The price is distorted and does not reflect power plants' expenses at all. Rating agencies can no longer look at this, and they are re-evaluating the positions of all market players.
* HN: But so far that has not affected you.
We have ended up in a fantastic position, with an excellent rating of A-. And only two large European companies have a rating with a stable outlook. The only other company to manage it is the Spanish firm iberdrola, which has wagered a lot on renewable energy sources. All others have a negative outlook, which basically means that within three months their rating will decrease by at least one degree. E. ON, RWE, Vattenfall, EdF and others are in this category. Since 2012, we have been the only large energy firm whose rating has not been lowered.
* HN: Why is ČEZ the only company in Europe to maintain this position?
We have always been conservative as far as debt levels are concerned, and we have resources that enable us to make money even in such dramatic situations. But I'm not saying that it cannot happen to us too. For example, it may happen if the price of electricity continues to decline. The price of EUR 20 is not the bottom, because there is no bottom. If everything goes as it has gone so far, the exchange and the market will fold, and electricity will start being delivered to people in a manner other than through market supply and demand. I can picture a situation in which every energy source will have a certain kind of tariff or subsidy or will compete in auctions, as the case is now with renewable energy sources.
* HN: When could such a scenario emerge?
That is difficult to estimate, but in around 2030 something major must occur.
* HN: Won't it happen sooner? German energy companies are already separating subsidized and profit-making renewable energy sources from traditional power plants. Aren't they holding a knife to the throat of the German government and threatening that if they don't receive support then traditional power plants will be closed, and Germany will be without electricity?
I don't think this is the main reason for the division. But it will also have this effect. It's like in the case of a balloon. Companies are gradually throwing off the weight, so that they can stay in the air. What E. ON did, when it directed traditional energy into Uniper, is an approach worthy of consideration under the conditions that exist in Germany. This is only what I deduce, and it has not been proved to me in any way, but a situation may arise when companies whose investments are being put in jeopardy by the current policies of the German government could end up in a dispute with the state. I don't know if this will happen, but managers may at least have to try it.
* HN: For two years you have been interested in Vattenfall's power plants in Germany, and now you have announced that you don't want them. Why?
The sale has taken almost a year. The situation is complicated for Vattenfall too, because it appraised its assets in Germany for a situation in which electricity would cost EUR 30. However, on the offer submission date it cost just over EUR 20. From an extensive check of assets that we performed and implemented in the situation with prices in March 2016, there are entirely different resulting numbers than those Vattenfall expected.
* HN: Do their assets have a negative value?
If we were to submit a binding offer today for the extent being sold, that number would have to be negative.
* HN: Czech Coal and Energetický a průmyslový holding together with PPF submitted an offer...
So they apparently presented a negative price.
* HN: But they say they didn't. They say they named a number of conditions under which they would get involved.
Vattenfall is selling very good assets. But there are many associated problems. Money and re-cultivation are important, for example. If the price of electricity remains as it is, then Vattenfall's power plants will never fill the re-cultivation fund. And there are more such problems.
* HN: Is Vattenfall in the past for ČEZ?
We have announced that we will not submit an offer, which means that we will not submit one in the extent in which assets are currently offered. We have been communicating with Vattenfall, and we are prepared to negotiate, if any of the conditions of the tender change. ČEZ is the most natural partner for Vattenfall. We have the same power plants and the same level of team cooperation in their operation, and we also understood electricity trading. If Vattenfall selects someone else, all that will be left for us to do is wish them good luck. At the same time, it is possible that in a couple of months we will return to negotiations. But we will not purchase a company that has no chance of generating profit. And the problem with Vattenfall is that no future profit will be purchased together with it.
* HN: So where do you want to buy up more profit-generating business?
In terms of territory, it must be in the Czech Republic or surrounding countries, where there is a stable regulatory environment. Germany remains a priority market, and we are interested in renewable energy sources and regulated sources, where there is a high level of certainty about profit. For our shareholders, we want stable economic management and stable dividends. However, we are not under so much pressure that we would have to buy something immediately. What's worse is when a transaction is carried out simply because it is said that you haven't carried out any transaction in a long time.
* HN: But aren't you too conservative?
I'd like to point out that it is because we are conservative that we are faring better than all of the other energy companies. For example, historically we have not invested in Russia.
* HN: But you have invested in the Balkans, for example, where you also depreciated a large amount of assets...
Yes, we have, but when you sum up the situation you will see that we are still more conservative than RWE or E. ON, for example. That company lost billions of euros in Russia.
* HN: You have also discussed investment in Russia, haven't you?
Yes, but the Board of Directors was against it. I was sitting there when the decision was made, and I am glad overall that we decided as we did and that we can now congratulate ourselves on the decision.
* HN: But in Albania, for example, you did lose a company.
First of all, our investments in the Balkans were on a lower scale than the investments by E. ON and RWE in Russia, for example. And when I began resolving the situation in Albania, it was mostly a defensive approach for how we could exit smoothly and get back some of the money that we had invested. We eventually succeeded in doing so, and the Albanian side, which had pledged to pay out approximately CZK 2.7 billion over five years, is fulfilling the agreements.
* HN: Let's return to your other plans. There has been speculation that you have your eyes on EdF's thermal plants in Poland and in Germany.
Poland is certainly an opportunity that we are looking at. Thermal plants are a business that is very close to us and is relatively safe, and Poland is a neighbouring country. In Germany, we are mainly focusing on renewable energy sources.
* HN: There has also been talk about your interest in Thyssengas, and such a venture would be your first entry into the gas transport sector.
Yes, that is an interesting opportunity. We are working on that, but I will not tell you more. In general, gas transport would fit our concept.
* HN: On Wednesday, you announced that you wanted to invest more into renewable energy sources. Haven't you fallen behind a bit in the green energy sector? Haven't you hoped for too long that traditional energy would recover? All of the major players got involved in green energy to a major extent from the very beginning.
And it seems to you that we have been slower?
* HN: It will come.
But I don't think so. Renewable energy sources have been through a very tumultuous period, and especially in the Czech Republic renewable energy has almost become a dirty word. It has been practically impossible to focus to a great extent on investments into green energy, since our main shareholder is the state.
* HN: Has that changed yet?
The system of support has changed, and that is probably the most important aspect. However, in the Czech Republic there are generally not many opportunities to construct wind farms. And the fact that we are now focusing mainly on Germany and Poland can be attributed mainly to our desire for a stable regulatory environment, which ensures us returns on our investments.
* HN: And is Poland stable? The Polish Parliament is currently discussing a bill that would block all of your wind projects that you are working on there...
That's not exactly what's going on. We are still analyzing the situation. In Poland we have about 15 projects, and the Krasin and Suvalky parks are still being worked on. The preparations have become somewhat stalled now. Auctions should no longer be announced for support of renewable resources, as they have been delayed by half a year as a result of the new government, and discussions are now taking place about what form the support model will take there. Although Poland is mainly focused on coal, which is supported by the current government, it will still have to fulfil the EU requirements for energy production from renewable sources, so there will be a certain framework of support there.
* HN: If we examine the current problems in Poland, it is clear that your ventures into wind power abroad have not been completely successful.
Why do you think so?
* HN: Well, the biggest project was the construction of a giant wind farm in Romania, where you also fought for several years with the state, which reduced support after the park was completed for more than CZK 20 billion. Then you had to write off the value of the park.
The rules changed there, but despite the revaluation of assets, I do not consider the project unsuccessful. It is still the largest European wind farm on the mainland, and the money that it generates is very good, even though these types of projects do not result in returns on investments within three or four years. It takes longer.
* HN: Where else do you want to invest into green energy?
As I have said, in countries with a stable environment. These mainly include Germany, where through our partner Aquila Capital we are considering investments into stakes in large wind farms in Germany, as well as France and the UK.
* HN: Following the announcement of last year's results, you repeatedly mentioned the option of selling some of your assets.
We have said we will not hesitate to do so.
* HN: And which sale will you hesitate to carry out the least? You reportedly wish to sell your Bulgarian distribution firm, since for several years you have been fighting with the regulator in Bulgaria, and you are considering arbitration due to marred investments.
I would not call it a fight with the regulator. But if the purchase of our Bulgarian assets made sense to someone, then I can imagine it. We don't have a ladder reflecting what we want to sell the most. If a transaction will make sense and will be beneficial for us, then we will not hesitate to carry it out.
* HN: Everything can be sold for the right price, after all.
I suppose so. But this seems to apply even more so as far as Bulgaria is concerned. The environment there could be described as complicated.
* HN: Who would buy the distribution firm from you there? Would the state take it back?
For example. We'll see.
* HN: Are there any negotiations being conducted with the state?
No comment. I cannot tell you more about that.
* HN: What else is for sale?
Bulgaria should be enough, shouldn't it?