ČEZ seeks to balance risks and opportunities as electricity earnings continue to shrink

12-11-2014

Pity the power companies: low electricity prices, renewables undermining past investments, and many with heavy debts. Czech power group ČEZ is suffering from the first two symptoms but is not burdened by the third and can still look to boosting its assets and services sold to its customer base.

Photo: European CommissionPhoto: European Commission Czech power group ČEZ delivered what most people would characterize as moderately disappointing results for the first nine months of the year on Wednesday. Profits for the period are down by around a quarter at just over Koruna 24 billion with the result for the whole year expected to stay on the same downward track at around Koruna 29 billion compared with the Koruna 38.2 billion turned in for 2013.

Electricity prices are still low and show little sign of recovering, though the recent European Union climate change deal could bring benefits for less polluting power plants in the next year or two.

So the watchwords for ČEZ for the next few years are cost cutting, seizing what opportunities are thrown up in its core energy sector, and expanding its activities to take advantage and hold onto its large customer base.

On the cost cutting front, ČEZ is looking to save Koruna 4.6 billion next year and already reckons that it has pinpointed where around 70% of those savings should come from. Among the measures is an expected 3.7 percent cut in the company’s staff of around 26,000. Savings for 2016 are seen even higher with a 4.5 billion benefit expected to feed into operating profits. At the same time though ČEZ is still aiming to stay among Europe’s top 10 electricity companies and is prepared to make opportunistic acquisitions to shore up its basic business where it can. The around 70 percent state controlled company is helped here by the fact that it is one of Europe’s least indebted electricity companies and while the likes of Italy’s ENEL and Sweden’s Vattenfall are offloading assets, ČEZ can wait in the wings to see what comes up in the sales. Even a morsel as large as the two-thirds stake in Slovakia’s biggest electricity company, Slovenské Elektrárne, could be gobbled up without much trouble, ČEZ chief executive Daniel Beneš let it be known at the results press conference on Wednesday.

Picking the prize assets is not so easy these days as the ground is moving under the big energy players. More and more renewable power sources are coming on line as EU countries continue to meet the across the board target that they contribute 20% of power needs by 2020. That means that established companies are being left with stranded power plants on their hands and undermining their bottom lines - facilities that cannot be operated at a profit and are a best mothballed in the wait for better times to come.

Distribution assets – basically the network of regional power lines and customer operations are also being undermined as well by the growing trend for households to develop their own power sources, especially solar panels, and the growing pressure to cut overall power consumption. Some of that downward pressure is also enshrined in EU targets.

But one asset is not losing its shine, and that’s ČEZ’s customer base of around 7 million people. Whereas once they were just sold electricity, now they are on the end of offers for natural gas, mobile phone services and breakdown services for domestic appliances. ČEZ will continue to probe ways of selling more to its customers, picking up partners with the technical know-how, such as O2 for its mobile services, where necessary.

12-11-2014