Romania’s largest hydro power producer Hidroelectrica, which has assets of around EUR 3 billion, became insolvent last week due to lack of liquidity. The board of administration said the measure was taken to save the company, which reported a profit of just EUR 1.5 million last year, but it could also lead to the cancelation of some of the murky contracts with “smart guys”, which generate lost revenues of around EUR 175-220 million yearly according to the IMF.
State-owned Hidroelectrica, which generates one third of Romania’s electricity, filed for insolvency on June 15 and the court approved the measure five days later, designating Remus Borza as the provisional judicial administrator. His company Euro Insol is handling the insolvency procedures of 140 companies with a combined value of EUR 600 million, including real estate projects and factories.
The first general meeting of creditors will be held in late August and Borza estimates the reorganization plan will take a year and a half. Hidroelectrica’s overall debt amounts to EUR 1 billion, including liabilities to suppliers and banks, according to Borza. He added that the turnover was EUR 714 million while the profit was a meager 0.2 percent last year.
Remus Vulpescu, president of Hidroelectrica’s administration board, said last week the insolvency procedure aims solely to reorganize the company, not to drive it into bankruptcy, fully nationalize it or sell off some of its assets. He added that the low profit of around EUR 1 million registered last year proved the company was being mismanaged.
Hidroelectrica, which has 5,300 employees, is one of seven state-owned companies that must appoint private managers, under the EUR 5 billion standby agreement with the IMF, European Commission and World Bank. This hasn’t happened so far, although some progress has been made in terms of improving the efficiency and transparency of SOEs. In late 2011 the government approved an emergency ordinance that implements the OECD principles of corporate governance in all majority state-owned companies.
Vulpescu said the drought that hit Romania in late 2011 had forced Hidroelectrica to cut output by 50 percent after it imposed the force majeure clause on September 30. This led to a loss of RON 121 million (EUR 27 million) in 2011, and another RON 112 million (EUR 25 million) in the first five months of 2012. In addition, the debt maturing over 90 days increased to RON 470 million (EUR 105 million), while the cash flow was reduced by 27 percent in 2012.
Making a state-owned power generator insolvent is something of an aberration, say pundits, as it has not happened with companies that are majority owned by other EU members.
“I haven’t heard of such a situation in the energy sector in recent years. In fact, state-owned energy companies have developed to the detriment of private firms. The fact that they used this extreme measure signals profound issues, which have accumulated over time – it isn’t just the effect of last autumn’s drought,” said Alexandru Lupea, partner, audit services, and group leader for energy, industry, mining and utilities at professional services firm PwC Romania.
The reorganization plan is usually added a maximum of 30 days after the final version of the claims table is posted, irrespective of the company size, according to Vasile Godinca-Herlea, managing partner at Casa de Insolventa Transilvania (CITR), an insolvency firm. He explained that the process of debt claims lasts a maximum of 80 days if the table of claims is not challenged, a development that can last between one month and a few years, in some cases. PM Victor Ponta set up a committee earlier this June to evaluate the economic and financial situation at Hidroelectrica. The committee, which comprised the heads of the Finance, Economy, Justice and Administration and Interior Ministries, was due to issue a report by June 15, when the company filed for insolvency.
Tide starts to turn against “smart guys”
The IMF has urged Romania to renegotiate the bilateral contracts with the so-called “smart guys”, companies that secured long-term power purchase agreements with Hidroelectrica. These contracts were sealed between 2001 and 2003, and have expiration terms in 2014, 2015 and 2018.
Vulpescu, who is the head of the Office for State Ownership and Privatization in Industry (OPSPI), said earlier this month that three quarters of Hidroelectrica’s power output went to eight beneficiaries with direct agreements.
The sales of Hidroelectrica to these companies amounted to RON 1.52 billion (EUR 340 million) in 2011, which is half of total sales.
This long-running issue has caught the attention of the European Commission, which in April opened five distinct investigations to see whether Hidroelectrica had purchased or sold electricity at preferential tariffs to electricity traders, industrial clients and electricity producers. Hidroelectrica might have indirectly subsidized clients which breaks EU state aid rules.
The commission says that contracts between the eight electricity traders and Hidroelectrica, some of which date back to 2004, along with contracts between the power generator and two industrial manufacturers, were concluded below market rates. Moreover, in contracts with the two electricity producers, Hidroelectrica bought electricity at above market rates. The commission concludes these companies may have gained an advantage over their competitors.
In April the Competition Council opened an investigation into a possible infringement of competition law by 12 companies and is collaborating with the commission. Both investigations should be completed by year end.
Although the “smart guys” are being investigated, they appear unwilling to renegotiate their contracts. Vulpescu said none of the companies with a bilateral contract had agreed to reduce the contract period and only small breakthroughs had been registered, such as a slight increase in prices and the reduction of delivered electricity.
Some commentators speculated that the board of administrators had voted for insolvency in order to scrap some of these damaging contracts, which seems an achievable aim. “Theoretically, during the insolvency procedure, ongoing contracts that don’t allow the company to maximize its wealth or are harmful to the company and its creditors can be terminated,” said Godinca-Herlea.
Hidroelectrica was supposed to list a 10 percent stake on the Bucharest Stock Exchange (BSE), with estimated earnings of around EUR 380 million which would have been used to bolster the share capital. The consortium that is intermediating this listing is comprised of investment banks Citi and Societe Generale, French lender BRD and the brokerage Intercapital Invest. Romania is planning to raise around EUR 1 billion from privatizing minority stakes in five energy companies on the BSE.
Specialists say it is possible to list a company after creditors have approved a reorganization plan, but this involves a risk. “Commercially speaking, given that the stock exchange reflects investors’ perception of the value of a company, the insolvency will probably have a negative impact on the listing process,” said Lupea.
Financing investments is also a challenge for Hidroelectrica, which has an installed capacity of 6,400MW and produced 14,710 GWh of electricity last year, a quarter of Romania’s output. The company manages over 270 hydroelectric plants and pumping stations. Hidroelectrica has secured financing of EUR 358 million for investments this year, with EUR 94 million coming from banks. Now investments may fall given the difficult situation of the power generator.
“In the current situation, potential financing will come from existing financiers (financing institutions). It depends on the quality of the reorganization plan, the measures it includes and the company perspectives, which will have to finance both the creditors and the financiers,” said Cristian Ravasila, senior manager, business recovery services leader at PwC Romania. “Theoretically it is possible to finance companies going through insolvency procedures. Practically, there are few cases due to higher financing costs, doubled by the coverage of the loan with guarantees above the regular level demanded by financiers.”
Godinca-Herlea, meanwhile, said banks usually avoid lending money in this situation.
Hidroelectrica has to pay back loans amounting to RON 2.1 billion (EUR 470 million). Last year, it took out EUR 110 million from the EBRD to revamp six hydropower stations. Another two loans worth around EUR 30 million each were taken out to finance the working capital.
The Ministry of Economy is the largest shareholder in Hidroelectrica, with an 80 percent stake, while the Property Fund has the remaining stake. However, the insolvency decision wipes off RON 3.2 billion (EUR 851 million) from the EUR 3.51 billion net asset value (NAV) of the Property Fund (FP), as the holding value in the FP’s NAV will change to RON 0 until the procedure is finished. The fund said Hidroelectrica’s insolvency proceedings would not impact the dividend payment, the buy-back program of shares or the secondary listing in Warsaw.
Rating agency Moody’s cut Hidroelectrica’s rating by four notches to B2, due to the insolvency request. The agency said the downgrade reflected the government’s inactivity and lack of transparency concerning the recent developments at Hidroelectrica.