CEZ Balkan Reverses Show Flawed Expansion Strategy, Analysts Say

CEZ AS (CEZ)’s plan to become a regional powerhouse among eastern European utilities is crumbling after a second country in three months moved to revoke the Czech company’s license.

Bulgaria’s energy regulator started a procedure last week to strip the Czech utility of the right to operate its power distribution network after high electricity bills ignited popular protests that brought down the Balkan country’s government. CEZ reports full-year earnings tomorrow.

The Bulgarian meltdown comes just weeks after authorities in Albania seized CEZ’s assets and drove it out of the country. Both cases show that CEZ underestimated the perils of investing in one of the poorest parts of Europe, analysts and investors say. CEZ shares have fallen 11 percent this year, more than double the decline in Prague’s benchmark index.

“Many investors haven’t even digested CEZ’s forced exit from Albania and they’re already confronted with the Bulgarian crisis,” said Jaroslav Vybiral, an analyst at Czech bank CSOB. “This is a major red flag for the entire investment community.”

Bulgarian Prime Minister Boyko Borissov resigned on Feb. 20 amid violent protests as Bulgarians poured into the streets to protest a sudden jump in power prices. The spike was caused by a cold winter and a delay in billing. Most Bulgarian households use electricity for heating.

An average Bulgarian household spends about 95 euros ($124) a month on electricity, according to Giorgi Atanasov, an electrician from the northeastern town of Silistra. An average income in Bulgaria, the European Union’s poorest member, was about 360 euros a month last year.

“People were livid when they received the last utility bill,” Atanasov said in a telephone interview. “Some families had to pay almost twice as much as usual. They just can’t afford it.”

Bulgaria represents about 1.5 percent of CEZ’s operating income and the loss may shave about 20 koruna off the share price, according to estimates from Erste Bank AG. The company said last week it invested about 12.8 billion koruna ($655 million) since it entered the country in 2005 and has so far received 4.8 billion koruna back in dividends.

CEZ shares dropped 1.1 percent yesterday to 607 koruna in Prague, near its lowest level since 2008 reached last week at 599 koruna. Electricity for next-year delivery in Germany, where CEZ exports part of its output, dropped for a second day to 41.90 euros per megawatt-hour, after touching a record low of 40.40 euros on Jan. 31.

“The Bulgarian investment looked sensible at the time because those markets showed a much greater growth than Western Europe and countries like Bulgaria and Romania were perceived as safe because they’re EU members,” Erste Bank analyst Petr Bartek said. “Let’s hope it doesn’t end the same way as in Albania.”

Bulgaria started a license revocation procedure last week, accusing CEZ of 21 violations including evasion of public procurement laws. The country’s regulator will hold a hearing with CEZ on April 16. CEZ said it would appeal against the license revocation with Bulgarian courts and asked the EU to put pressure on the Balkan country. Czech Prime Minister Petr Necas called the regulator’s decision an “unprecedented step.”

Prague-based CEZ went on a shopping spree in the second part of the last decade under former Chief Executive Officer Martin Roman, who bought up stakes in distribution networks in several Balkan countries including Romania and Turkey. The expansion strategy came to a halt in 2010 as electricity prices declined and the company decided to focus on a planned $10 billion expansion of the Temelin nuclear power plant.

Now the problems in the Balkan markets, stagnating power prices and the collapse of European carbon credit market threaten to put a dent in CEZ’s profits.

CEZ is one of the key contriburors to Czech state coffers as the government owns 70 percent of the company. It paid the state about 130 billion koruna from 2009 to 2011 in dividends, taxes and other payments.

“The management’s next steps will be under much closer scrutiny from investors than in the past,” CSOB’s Vybiral said. “Economically speaking the Temelin expansion doesn’t make much sense at this point, which raises further uncertainty and doubt.”

To contact the reporter on this story: Ladka Bauerova in Prague at lbauerova@bloomberg.net

To contact the editor responsible for this story: Will Kennedy at wkennedy3@bloomberg.net

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