Albania's investment meltdown credit negative for CEZ

Last Tuesday (November 20), the Albanian Energy Regulation Authority officially notified CEZ Shperndarje, the Albanian electricity distribution utility 76%-owned by Czech utility CEZ, a.s. (A2 stable), that the regulator had initiated a procedure to withdraw the companys license to...

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Albania's investment meltdown credit negative for CEZ



Moody's - 27.11.2012

Last Tuesday (November 20), the Albanian Energy Regulation Authority officially notified CEZ Shperndarje, the Albanian electricity distribution utility 76%-owned by Czech utility CEZ, a.s. (A2 stable), that the regulator had initiated a procedure to withdraw the companys license to operate in the country. The move is the latest development in an increasingly fractious relationship between CEZ and the Albanian government, and is likely to cause CEZ to write off its investment in 
The threat to withdraw the license came in response to CEZ Shperndarje cutting off electricity to its non-paying customers, particularly some state-owned water companies. This in turn led the Albanian government to obtain a court order forcing CEZ Shperndarje to reconnect these customers.
CEZ has been facing operating, regulatory and legislative difficulties in Albania since its acquisition of CEZ Shperndarje (originally named Operatori i Sistemit te Shperndarjes) in 2009. The Albanian Energy Regulation Authority has refused all tariff increase applications from CEZ Shperndarje since 2010 despite the business experiencing significant cost inflation. In 2012, the regulator approved a 91% increase in the price of electricity that CEZ Shperndarje must purchase from state-owned suppliers, but did not allow the company to pass through the increase to customers, although the utility eventually did receive some modest compensation.
As a result, CEZ Shperndarje generated a CZK3.8 billion (€150 million) EBITDA loss for the first nine months of 2012 and expects to incur a total EBITDA loss of CZK4 billion (€160 million) by year-end. In addition, the Albanian government and a number of state- owned entities owe CEZ Shperndarje €132 million in unpaid bills. However, we expect this to be somewhat offset by the fact that CEZ Shperndarje has been withholding payments to some state-owned electricity suppliers.
A possible write-off of CEZs €102 million initial investment and up to an additional €100 million of other provided or committed funds is clearly negative for CEZ. However, the group is seeking recompense through a €60 million World Bank guarantee that it negotiated as part of its investment in Albania. If successful, this may partially offset the write-off.
The cash effect from an immediate exit from Albania could be less than €200 million, as CEZ stopped providing any funding to its Albanian subsidiary this summer. A full exit from the investment would prevent the accumulation of further losses, protecting CEZs future earnings. Furthermore, based on 2010 figures, the exit would save CEZ up to CZK4 billion (€160 million) of investments originally planned over the next five years.
Source: bne


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