CEZ Balkan Strategy Collapses as Second Nation Cuts License

Feb. 27 (Bloomberg) -- CEZ AS’s plan to become a regional powerhouse among eastern European utilities is crumbling after a second country in three months decided to revoke its license.

Bulgaria’s energy regulator last week moved to strip CEZ of the right to operate its power-distribution network after high electricity bills triggered popular protests that brought down the government. The public prosecutor said today it started investigating investments by CEZ and two other distributors.

The loss of rights in Bulgaria comes weeks after Albanian authorities seized CEZ’s assets and drove it out of the country. Both cases show that Prague-based CEZ, which went on a Balkan buying spree in the last decade under former Chief Executive Officer Martin Roman, underestimated the perils of investing in one of the poorest parts of Europe, according to analysts.

“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.”

CEZ shares have fallen 12 percent this year, more than double the decline in Prague’s benchmark index. The company, which traded down 1.3 percent at 598.9 koruna as of 2:50 p.m. today, reports full-year earnings tomorrow.

Street Protests

Bulgarian Prime Minister Boyko Borissov resigned on Feb. 20 as Bulgarians poured on to the streets to protest rising power prices, which had been driven up by a cold winter and a delay in billing. Most homes in the country use electricity for heating.

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

“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,” said Petr Bartek, an analyst at Erste Bank. “Let’s hope it doesn’t end the same way as in Albania.”

April Hearing

Bulgaria started the license revocation last week, accusing CEZ of 21 violations including evasion of public procurement laws. The regulator will hold a hearing on April 16 with CEZ, which plans to appeal the revocation and has asked the European Union to put pressure on the country.

“CEZ disagrees with the license withdrawal,” Barbora Pulpanova, a company spokeswoman, said in an e-mail. “There is no legitimate reason for it since CEZ has fulfilled all its lawful obligations.”

An average household in Bulgaria, the EU’s poorest member, spends about 95 euros ($124) a month on power, according to Giorgi Atanasov, an electrician from Silistra in the northeast. The average monthly income was about 360 euros last year.

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

CEZ’s Balkan acquisitions also included stakes in distribution networks in Romania and Turkey. The expansion strategy came to a halt in 2010 as electricity prices declined and the company shifted its focus to a planned $10 billion expansion of the Temelin nuclear plant at home.

Power Prices

Electricity for delivery next year in Germany, where CEZ exports part of its output, has declined 7.8 percent this year, and traded unchanged at 41.85 euros a megawatt-hour as of 2:55 p.m. local time today.

Stagnating power prices may compound the Balkan setbacks to dent profit for CEZ. The utility, 70 percent-held by the Czech government, is one of the main contributors to state coffers, paying 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.”

Bulgaria has started investigating investments by CEZ, EVN AG and Energo-Pro, Chief Prosecutor Sotir Tsatsarov told reporters in Sofia today. Tsatsarov expects preliminary results from the probe by March 22.

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