Furious that it has not been officially notified over CEZ Group’s intention of selling its Albanian unit, the Albanian government, which owns the minority 24 percent stake in the electricity distribution system, has warned it will undertake legal steps to block the sale
TIRANA, Dec. 18 – On the verge of having its Albania licence revoked, Prague-based CEZ Group has announced that it is offering its Albanian subsidiary, CEZ Shperndarje, for sale because of rising losses and disputes with the country’s authorities only three and a half years after taking over the majority stake of the former state-owned electricity distribution operator OSSH. However, furious that it has not been officially notified over CEZ Group’s intention of selling its Albanian unit, the Albanian government, which owns the minority 24 percent stake in the electricity distribution system, has warned it will undertake legal steps to block the sale. Government claims that CEZ’s failure to fulfill its contract obligations over imports, investments and reducing grid losses has caused the state USD 1 billion in damage which will probably end up as a claim when the dispute is examined by an international arbitration court.
“The ɅZ Group has initiated a process to sell its Albanian distribution business, CEZ Shp쳮darje. Potential buyers may thus express their interest during January, and a decision on the subsequent steps will be made afterwards,” CEZ said in a statement. The decision comes just after CEZ has had its bank accounts seized over a 430 million lek (Euro 3 million) fine by Energy Regulatory Fine (ERE) on the company’s failure to cover grid losses with imports and a warning by government of legal action for what it calls intentional power cuts stirring up public unrest. Many areas in Tirana and all over the country have been facing prolonged power cuts in recent days because of the company’s inability to repair power faults in time as a result of company’s deteriorating financial situation, sparking protests and blockage of roads. “Delays in the replacement of burned equipment are a result of the company’s severe financial situation. Currently, ERE has seized 430 million lek from the company’s accounts,” says CEZ, denying any intentional action and blaming bad weather and illegal connections for the power cuts.
CEZ Shperndarje has recently confirmed it cannot resume power imports which had been set as a key condition after ERE started procedures to revoke the company’s licence’s last November. CEZ claims the company’s financial situation has been affected by the unfavourable business climate and arbitrary decisions by ERE and the Albanian government. While the initial 30 deadline expired on December 20, CEZ is expected to officially have its licence revoked by January 20, 2012.
Reacting after CEZ’s statement of putting its majority stake up for sale, Energy Regulatory Entity (ERE) said the Czech company cannot complete the transaction to another company if does not apply with the energy watchdog and is given the approval.
Gov’t claims USD 1 billion in damage
In a statement issued on Wednesday, government says that it has only leaned through media about CEZ’s intention of selling its Albania unit at a time when ministry representatives participated in CEZ Shperndarje’s shareholders meeting in Prague a couple of days ago. “The action undertaken by CEZ a.s. shows the complete lack of seriousness of this company during negotiations, as well as the fact that CEZ a.s. is not at all committed to solve the problem that arose exclusively from to its failure to fulfill its contractual obligations. In essence, CEZ a.s. has failed to fulfill its main obligations, as specified in the privatization contract and the legal documents related to this process, causing damage at the level of 1 billion US dollars to Albania.” Government says the current situation is a result of CEZ’s poor management and its failure to meet contract obligations. The Energy Ministry says grid losses in 2012 climbed to 50 percent and that CEZ fulfilled only 7 percent of its investment plan. “The company buys electricity from KESH at a symbolic price of 18 euro MW/h, while CEZ Shperndarje sells energy at 80 Euro MW/h, which brings revenues approximately to 43 billion ALL,” says the ministry.
World Bank guarantee
CEZ says it has launched legal steps to activate a 60 million euro ($76.8 million) guarantee issued by the World Bank for its power-distribution operations in Albania. CEZ received its guarantee from the World Bank, already active, as an incentive to take over Albania’s OSSH power distributor in 2009. While CEZ is seriously considering leaving Albania and getting its Euro 60 mln guarantee, World Bank’s Regional Coordinator for Southeast Europe Jane Armitage has stressed the Bank is “certainly not ready to execute its guarantee at this point.”
At a time when the Albanian government-CEZ divorce over the management of the country’s problematic power distribution network seems inevitable, both parties are preparing for a solution that would come from an international arbitration court. While CEZ has already hired U.K-based Schindlers law firm to negotiate its disputes, the Albanian government has also recently picked U.S Patton Boggs. CEZ has invested roughly 120 million euros ($155 million) in its Albanian unit, but due to ongoing regulatory and commercial hurdles the company posted a first-half 2012 loss of USD 119 billion.
The IBRD, one of five institutions that make up the World Bank Group, says it has been officially notified by CEZ Shp쳮darje (CEZ SH) of the existence of a claim against the Government of Albania. “Pursuant to the relevant agreements entered into by the parties, the Government and CEZ SH are required to follow specific procedures to verify CEZ SH’s claim which will trigger a sixty days conciliation period intended to resolve the claim in an amicable manner. We encourage both parties to engage in good faith in this Conciliation period,” says the IBRD.
Moody’s: CEZ to lose Euro 200 mln over exit
An immediate departure of Czech energy group CEZ from Albania would mean a loss of almost Euro 200m for CEZ, according to a report by the Moody’s rating agency. The departure would nevertheless prevent CEZ from incurring further losses in Albania and would thus protect its future revenues, according to Moody’s. IF CEZ decided to leave Albania, it would write off EUR102m for its initial investment in Albanian power distributor CEZ Shperndarje and another almost Kc100m that it has transferred to its Albanian division so far.
Debts to KESH
Albania’s Energy Regulatory Entity (ERE) has ruled Czech-owned distribution operator CEZ Shperndarje, which is seriously considering leaving Albania and addressing arbitration court over disputes with government, will have to compensate state-owned power corporation KESH over its failure to make compulsory electricity imports this year. Since last summer, CEZ has failed to make compulsory imports to cover the high grid losses in the Albanian distribution system, currently at around 50 percent, nearly double compared to three and a half years ago when CEZ bought 76 percent of shares for Euro 102 million. Power corporation KESH, which has been making continuous power imports during this year because of prolonged drought affecting domestic hydro-electricity generation, says CEZ’s failure to fulfill its obligation of covering grid losses with imports has further aggravated its financial situation. CEZ, which is also in severe financial straits, says the situation is a result of Albanian consumers not paying electricity bills.
Government awarded KESH 2 billion lek (Euro 14 million) from its contingency funds in early 2012 to make electricity imports, a Euro 40 million few months ago and is also negotiating with the World Bank over a new USD 100 million loan to cash-strapped power corporation to secure electricity imports.
Escalating conflict
The government-CEZ conflict reached its peak on November 16 after CEZ cut power to debtor water supply companies leaving half of Albania without water and sparking nationwide protests which lasted for only few hours after police intervened arresting several CEZ employees and forcefully reconnected power.
Following the reconnection of power to water supply companies later on Friday, Nov. 16, ERE’s board of commissioners held an emergency meeting deciding to start procedures for the removal of CEZ’s licence. The decision had been postponed three times until then. ERE determined four conditions CEZ has to meet within 30 days or else it will have to leave Albania. The four conditions are related to the resumption of electricity imports to cover grid losses, the submission of the audited financial balance sheet for 2012, not making collective power cuts, and normalizing financial balance sheets. The Tirana District Court recently banned CEZ to cut power to water supply companies or public institutions until a final and legal deal is reached, ruling that the distribution company be fined 100 million lek/hour for each power cut.
Prague-based CEZ Group had warned it would decide by the end of the year if it will sell its subsidiary in Albania, the CEZ Shperndarje distribution operator, following disputes with the Albanian government over tariffs, taxes and investments. Tomas Pleskac, CEZ board member and head of international business, said CEZ has indications of interest from potential buyers, including the Albanian government, venture capital funds and electricity traders.
“In Albania there are two main problems, the level of electricity theft from the network and lack of creditworthiness of customers,” said CEZ’s Tomas Pleskac, adding that Albanian authorities have been dragging their feet since CEZ took over the company in 2009 and preventing CEZ from generating a profit.
CEZ has invested roughly 120 million euros ($155 million) in its Albanian unit, but due to ongoing regulatory and commercial hurdles the company posted a first-half 2012 loss on earnings before interest, tax, depreciation and amortization, or Ebitda, of 2.3 billion koruna ($119 billion).
CEZ’s exit scenarios
Scenarios behind the cancellation of contract with CEZ Shperndarje include government taking over the distribution sector majority share, or the temporary takeover of the full shares and the contracting of another private company. Failure to import electricity for its grid losses, debts to state-owned power companies and lack of investments are the three main reasons the Energy Regulatory Entity (ERE) intends to strip CEZ Shperndarje, a subsidiary of Czech Republic CEZ Group, from its power distribution licence in Albania.
Government has recently cut 2.5 billion Lek (Euro 17.5 mln) in unconditional grants to local government units because of debts water supply companies under their administration owe to CEZ Shperndarje operator. Earlier this year, Albania’s Energy Regulatory Entity (ERE) fined Czech-owned CEZ Shperndarje distribution operator 430 million lek (Euro 3 million) because of failing to cover grid losses with imports. CEZ had previously been fined Euro 30 million by the tax administration over VAT payments. CEZ Shperndarje, a subsidiary of Czech-Republic based CEZ Group has been operating the Albanian distribution network since 2009 when it signed a contract with the Albanian government buying the former OSSH 76 percent majority stake for 102 million Euros.
While the Albania’s Energy Regulatory Entity (ERE) is expected to make a decision on the licence of Czech-owned CEZ Shperndarje distribution operator, the Albanian government could take over CEZ’s shares until the dispute is legally resolved. The most possible option is the shift of CEZ Shperndarje from CEZ’s ownership to ownership by the Albanian economy ministry for a symbolic price of 1 Euro,” said deputy Energy Minister Enno Bozdo.
