CEZ is running short of cash despite having invested some EUR 25 billion over the last ten years in the future profitability of the firm.



foto: Michal Sváček, MAFRA

Martin Roman, Daniel Benes and Vladimir Schmalz in December 2007


Last month, CEZ announced that, due to market conditions, it had embarked upon major staffing and cost cuts amounting to EUR 40 million over the next four years. And this week, Daniel Benes revealed that CEZ would be looking to make additional savings of another EUR 80 million immediately.

CEZ's profitability has been declining since 2010. Its profit after tax peaked at some EUR 2 billion in 2009. CEZ's estimate for this year is around EUR 1 billion. In 2015 this figure is expected to drop to around EUR 800 million.

CEZ has spent EUR 25 billion (some Kc 625 billion) in upgrading and expanding its generation fleet since 2004, under the direction of Martin Roman and Daniel Benes, precisely in order to secure the success of the firm under these changing market conditions. That is what capital expenditure is: expenditure which creates future benefits. It is too easy to blame CEZ’s cash flow problems today on the wholesale price of electricity. Did its management not foresee tough times ahead, and adjust its capital expenditure accordingly? That is a rhetorical question.

In the case of CEZ, these expenditures have included the badly mismanaged renewal of CEZ’s domestic production capacity, as well as the foolhardy acquisition of distribution and generation assets across central and south east Europe. Much of this EUR 25 billion has now been wasted. But how much of it has actually been stolen ? This is a question that no Czech finance minister, no CEZ internal auditor and no CEZ supervisory board member has ever dared ask –at least not in public.

Could it be as much as 10%?

As we pointed out in February 2010, in a study entitled CEZ Unplugged (English and Czech versions available here), the future success of CEZ depends upon its ability to execute its capital expenditure program efficiently, honestly and above all at home.

Czech business with Balkan bits bolted on

Martin Roman wanted you to see CEZ as an integrated central European utility, but it has only ever been a Czech business with a handful of Balkan bits bolted on. As we wrote almost five years ago, “CEZ generates more than 90% of its EBITDA in the Czech Republic, and its most valuable assets are its Czech generation assets. Much touted acquisitions in the Balkans and in Poland represent only 9% of the group enterprise value. Czech operations are clearly the largest contributors to CEZ’s overall profitability. This picture is unlikely to change even with CEZ’s ambitious investment plans abroad [in 2010, CEZ was still planning to match every 1MW built abroad with at least 1MW at home. These plans have since been abandoned].”

We concluded back then, in words that were perhaps too subtle for most Czech analysts, that “CEZ’s future profitability depends on the efficient execution of its Czech capital expenditure plan. Protracted and overpriced extension of the firm’s nuclear capabilities and renewal of its lignite-fired fleet may burden free cash flow, parts of which are now tied up in financing foreign acquisitions of questionable value to investors. And given the government’s cavalier approach to scrutiny of the management it appoints, the risk to the investor that management may be tempted to seek rents while executing the investment plan remains high. We believe that wasteful procurement and investment may become a burden on free cash flow in the near future."

In plain English, the firm's future success was being mortgaged to its present management and their political cronies in government. And in even plainer English, money set aside to secure the future of the firm was being misspent or stolen while the supervisory board and the auditors looked the other way, and if this continues, the firm will be in financial trouble.

It is too easy to blame market conditions. And it is too easy to blame Roman and Benes. CEZ is a part of this country’s common wealth. Its gradual destruction is a collective failure of accountability by a generation of analysts, auditors, lawyers, managers and politicians. All of them have been feeding off the firm since April 1st 2004, and not one of them has had the guts to point out that the emperor is naked.