Hidroelectrica - new terminations of contracts with the entrepreneurs of "historical investments"

Recorded by Alina Toma Vereha (translated by Cosmin Ghidoveanu)
Ziarul BURSA #English Section / 1 august 2014

Hidroelectrica - new terminations of contracts with the entrepreneurs of "historical investments"

"An extension of the prosecution is expected, to cover the retooling of the Porţile de Fier II plant and of the plants of the Lower Olt"

Borza: "Hidroelectrica finances the investments it needs, but for less money, because less is being stolen"

The lawyer says that the company was being "leeched" by over 400 "clever boys", through overpriced works

Hidroelectrica SA has made a milestone profit of 509 million lei, in the first six months, up 28 million lei compared to the similar period of last year, amid a drop in revenues, which led to much criticism against the receiver of the company, Remus Borza, who was accused of having achieved this by cutting the investment budget. He denied these accusations and told us, in an interview, that he is making sufficient investments and maintenance works, but at lower prices than what the company used to pay prior to filing for insolvency. Remus Borza claims that overpriced works were inflating the investment budgets prior to 2012 and that Hidroelectrica was being leeched by almost 500 "clever boys". The lawyer says that he has been negotiating for two years with companies such as Hidroconstrucţia, Romelectro or Energomontaj, the reduction of the price of the works on ongoing investments and claims that he would go as high denouncing contracts if they do not agree on the new prices. Mr. Borza told us that all the contractors have overpriced contracts. The receiver of Hidroelectrica also provided details on how he cut costs in order to increase profitability and what he plans to do in the future to increase efficiency.

Reporter: How did you succeed in increasing the profit of Hidroelectrica after the first six months, given the drop in revenues and the payment of several of the company's loans? Did you cut the investment budget or not?

Remus Borza: I have found with much chagrin that a milestone financial result of Hidroelectrica has been debated in a tendentious manner by people who have no connection to the business.

There is talk that the profit of 509 million lei that the company made in the first half of 2014 and which surpassed the record achieved at the end of the similar period of 2013, was only due to having cut the funding allocated for investments.

To eliminate this mistake, I will reveal to these "experts" an elementary accounting principle. The investment budget, whether it is big or small, has nothing to do with the profit and loss account. The budget could have been 400 million Euros and still not have an impact on the financial result of Hidroelectrica. Similarly, we could have had 0 Euros allocated for investments and the structure of the profit and loss account of Hidroelectrica wouldn't have changed. The investment expenses are capitalized in the balance sheet of the company, as they are realized, and only upon their commissioning would they be amortized according to the company's financial policy. Until then, those expenses are recorded in the account 231 - tangible assets in progress.

I did not cut the investment and maintenance budget. Aside from a big mistake, my critics' statements also include a big lie. Namely that Hidroelectrica has no more investments. Over the last three years, Hidroelectrica has constantly allocated 200 million Euros a year for investments. In Romania, there are over 700,000 companies registered. I will leave the same "specialists" to name 5 companies that over the last 3 years have had such budgets for investments. Hidroelectrica indisputably remains the biggest investor in Romania. In the last 15 years alone it has financed investments in retooling and in the commissioning of new hydroelectric facilities of more than 3 billion Euros.

In the first half of the year, the revenues of Hidroelectrica have decreased 110 million lei compared to last year's similar period because the price that electricity trades at has decreased as well.

The increase of the profit in the first half of this year comes first of all on the back of the deleveraging of Hidroelectrica, by reducing its outstanding bank loans. On June 20th, 2012, the company owed banks 841 million Euros. The outstanding loans we currently have only amount to 216 million Euros. By the end of the year we will get reduce that amount to 180 million Euros. This means that every year, Hidroelectrica pays several tens of millions of Euros less in interest.

Hidroelectrica has been and is a very good client for banks. We have optimized the current loan balance and we have renegotiated the interests and commissions. The liquidity of the company has increased substantially between the beginning of the insolvency procedure and the present day. Hidroelectrica currently has about 600 million lei in cash placed in bank deposits that generate additional revenues.

We have also reduced labor and maintenance expenses without endangering the safe exploitation of the hydroelectric plants.

Reporter: How much have you allocated for investments this year?

Remus Borza: Approximately 200 million Euros. Sure, in 2011 and 2010, the company had annual investments of 350 million Euros. The difference between this year's budget and that of 2010-2011 is the ripoff. I am talking about the fact that outrageous prices were paid for works or services, up to 18 times higher than the market price. In the last few years prior to the insolvency, 487 companies, many with a parasitic existence, were "subscribers" to fat contracts concluded with Hidroelectrica.

We are currently financing these investments which would profit Hidroelectrica instead of the leech-companies. After '90, Hidroelectrica was forced to take on investments which should have normally been financed from the state budget. Investments in which the energy component had a secondary part, instead being dominated by social, environment or agricultural functions. To be able to finance these investments, which would have never been amortized, Electrica had to borrow from banks at burdensome interest rates. That's how it has come to the point where, in June 2012, Hidroelectrica was the most leveraged company in Romania, owing over 4.3 billion lei. Naturally, Hidroelectrica has not allocated funding for these investments, during its insolvency. Because I can not accept to pay 900 million lei for a plant with a capacity of just 9.7 megawatts which is under construction in Paşcani. That means approximately 20 million Euros per installed MW, about 10 times more than the average in the 28 countries of the European Union. This kind of extravagant prices we see in the case of other investments as well: Făgăraş-Hoghiz, Siriu-Surduc, Valea Sadului, Runcu Firiza, Dumitra-Bumbeşti, etc. There is no economic reason for Hidroelectrica to spend 20 million Euros per megawatt of hydroelectric power, while in Europe, one megawatt of hydroelectric power gets built for a cost of 2-3 million Euros, one megawatt of wind power gets built for a maximum of 2 million Euros and a megawatt of photovoltaic energy gets built for 700-800,000 Euros. Due to a more than generous subsidy scheme backed by the Romanian state, we currently have connected to the system almost 6000 new megawatts out of renewable or co-generation sources, which have generated a surplus of almost 18 million Mwh, which led to the drop of the price of energy in a market where consumption has dropped by over 8 million megawatts in the last five years, it makes no sense from an economic point of view to build new capabilities for the generation of energy. Hidroelectrica has an installed power of 6500 megawatts and a median annual output of 16 million Mwh. Even at its current capacity, Hidroelectrica is having trouble selling its energy. Under these circumstances, what do we need new production facilities for?

Reporter: What examples of overpriced works can you give us?

Remus Borza: There have been some contractors who keep complaining in the media that we have increased the profit of Hidroelectrica by cutting the investment budget. For example, the ISPH (The Institute for Studies and Hydroenergetic Designs). In 2012, the budget of Hidroelectrica allocated for studies was 38 million lei. Currently, it is only 2 million lei. I understand the frustration of the people at the ISPH, but that doesn't entitle them to attack the credibility of a company that is strategic for Romania. Many of those studies were completely useless for Hidroelectrica. They were being ordered according to a certain cyclicity. Every two-three years, the company would order the same studies, which in the end weren't used for anything.

The managers of Hidroelectrica were careful to increase the turnover and profit of their friends' companies, whether we are talking about ISPH, or we are talking about Hidroconstrucţia or other contractors of Hidroelectrica.

The managers of Hidroconstrucţia also claim that I've achieved a big profit because I've cut the investment budgets. I want to remind them that Hidroconstrucţia, in the last 10 years, has collected over 1 billion Euros for some estimates and works performed at prices far higher than the market average, which will also be proven through an international technical audit which we are going to order.

Reporter: Are you referring to the investments with a low energy component?

Remus Borza: Yes. In Paşcani, Făgăraş, Firiza, Siriu, etc. Investments which we have spent so far on 1,2 billion Euros and which we would have to allocate another 3.8 billion to complete. For just 440 megawatts. For example, in Dumitra-Bumbeşti the construction of a turnkey hydroelectric plant was ordered, for a firm budget of 104 million Euros. We have currently reached 130 million Euros spent and the project is only 60% complete. So we need to spend an additional 100 million Euros to complete it, even though Hidroconstrucţia and Romelectro were supposed to fit within the budget of 104 million Euros.

Reporter: So will you terminate these contracts as well?

Remus Borza: Yes, if the people of Hidroconstrucţia refuse to be reasonable. For two days we have been renegotiating the prices of these contracts. If they put us in the position to terminate those contracts, then a call for tenders will be held for the rest of the project.

The same has happened with the retooling of the Stejaru plant, for which a call for tenders was held two years ago, with a winning bid of 110 million Euros. I have cut the budget of the investment to 75 million Euros, I have terminated the financing contract with the EBRD and I have reprised the call for tenders at a far lower price. I've also found self-financing sources for this very important work and I assure you that, in two months, the contract for the execution will be granted. Immediately after the granting of the works of the Stejaru plant, Hidroelectrica will also hold a call for tenders for the retooling and modernization works for the Vidraru plant. This time as well, we will come up with self-financing sources, with the investment being estimated at a similar amount to the one of Stejaru.

Reporter: Are these investments included in this year's budget?

Remus Borza: Obviously. We have 75 million Euros for Stejaru, approximately 100 million Euros more for the commissioning of new energy generation groups at the Racoviţa, Răstoliţa and Bretea plants, and another 40 million Euros for maintenance. At Bretea for example, the cost is more than 9 million Euros for the installed MW, even though it is a hydroelectric plant built in the lowlands where it shouldn't cost more than 3 million Euros per megawatt.

Because of that, I keep saying that the existence of Hidroelectrica served no other purpose than to feed the leech companies. The company did nothing else but outsource its profits to the energy traders and the major contractors.

Reporter: Do you have the overcharging problem with all the contractors?

Remus Borza: Yes. Not just on the construction side, but even on the retooling side. We have ongoing lawsuits with the Voith and Andritz consortium, which, since 1997, has been constantly awarded directly retooling works worth more than 1 billion Euros. Leaving aside the prices charged, which have been far higher than in other markets, we are speaking first of all about the non-compliance and the unsatisfactory quality of the retooling works. We are having major operating problems with the plants of Porţile de Fier I and II and with the ones of Oltul Inferior which were retooled by Voith and Andritz and which are currently the object of criminal cases being investigated by the General Prosecutors' Office.

Reporter: You have been accused by some union leaders of having also cut the maintenance budget and of endangering the safe exploitation of the plants.

Remus Borza: We have 40 million Euros allocated for maintenance. Sure, that's a step back from 100 million Euros in 2011, because we are no longer funding the leech companies. There were plenty of those at the "Hidroserv" companies as well. We have restructured the 8 Hidroservs entities into a single company, which hasn't died and isn't going to die. We are going to qualify Hidroelectrica-Serv to engage in other types of works beside pure maintenance. I am referring to the development of some technical capabilities on the equipment assembly side, automation, construction, retooling.

Hidroelectrica-Serv must understand that we will no longer allocate funds from the budget according to its needs, but according to ours. This year's budget covers all the maintenance needs of Hidroelectrica.

Sure, we will continue the restructuring of Hidroelectrica-Serv. In October 2013, at the time of the merger between the 8 "Hidroserv"s, there were 2603 employees. Now there are 1980 and at the end of the year there will be approximately 1600. Streamlining is painful from a social point of view, but it is necessary. Almost 1300 employees have been let go from Hidroelectrica as well, in the last 18 months.

When speaking about union leaders, in reality we are speaking about one of them only, who was in charge of fire extinguishment, even though as far as I know, water isn't flammable, who has never set foot inside the installations in his life, who would spend around 200,000 lei a year of the company's money on allowances and trips, who physically assaults his female colleagues and even has a lawsuit filed against him on that, who is not an employee of Hidroelectrica but who is politically hired, as he is a loyal member of a political party that was born dead. A leader whose union has no longer any influence at Hidroelectrica-Serv, as he has been disavowed by the other union leaders and by the federation. A nobody.

Reporter: Does Hidroelectrica intend to export energy?

Remus Borza: The new units for generating energy from renewable sources and co-generation will soon reach 6,000 installed MW, in a market with an increasing number of producers, and with a shrinking number of consumers.

We have exports as an alternative, but the problem is that the domestic energy producers owned by the state are not competitive. In November we will interconnect to a regional energy market, that Hungary, the Czech Republic and Slovakia are active on. The problem is that these countries do not have the so-called "pillar tax". This tax alone means an additional cost of 11 lei per MWh for Hidroelectrica, namely an additional expense of about 40 million Euros which diminish the company's profit and increase costs.

In the neighboring countries there is no regulated market, as it has been liberalized for a few years now. In Romania, we will still have a regulated market until December 31st, 2017. Hidroelectrica will also post a loss of another 50 million Euros, because the regulator has forced it to practice a tariff that does not cover its costs. To the population, the company delivers 5.3 million MWh at a price of 115 lei per MWh while the true cost is 160 lei per MWh.

In the countries which we will form the regional energy market with, there is no tariff for the processing of water, which gives producers in those countries a net benefit. Hidroelectrica on the other hand pays 80 million Euros every year to "Apele Române", which adds another 22 lei to the price per megawatt.

Also, the distribution and transport fees are almost double what they are in the neighboring countries.

All these aspects should serve as food for thought for the authorities, which must take measures immediately to increase the export competitiveness of the Romanian energy producers.

Reporter: You have recently compared the boom in the green energy sector with the one in the real estate sector. When do you think the renewable energy bubble will burst?

Remus Borza: The market usually resolves all the imbalances in the end. I think that the bubble of renewable energy will burst this year, because the market can not absorb the power and output surplus. Renewable energy is highly unpredictable, and consumers, especially industrial ones, need stability and consistency. Industrial users will always return to energy producers who use primary sources, provided they streamline their costs.

I hope that by the end of next year, Hidroelectrica will reach 120 lei per MWh following the measures to increase efficiency. When that happens, hydroelectric energy will be competitive for exports as well.

Right now, everyone knows how to produce energy, but few people know how to sell it.

Hidroelectrica will have to develop further capabilities and sell more than it produces.

Reporter: You have hired Biris&Goran to provide consulting to Hidroelectrica in order for the company to see what its export options are. More to the point, what are the company's plans in that regard?

Remus Borza: We have several working options. All I can tell you right now is that in the last quarter of the year, Hidroelectrica will be active in Hungary and Serbia with trading offices.

Reporter: How do you feel that Hidroelectrica will end this year in terms of its financial results?

Remus Borza: In the first six months, the company has exceeded the budgeted profit for the entire year 2014, which was 322 million lei.

I estimate that the company's financial result this year, which was very difficult due to the new taxes that were introduced, will be outstanding. I use the word "hostile" because Hidroelectrica has a loss of 40 million Euros due to the introduction of the special constructions tax (ed. note: the "pillar tax") and another one of 50 million Euros because of the regulated tariff. We supply energy as part of the regulated basket to 115 lei Mwh, whereas for the population the tariff exceeds 380 lei per Mwh. The regulator is a friend to the energy distributors and an enemy to the producers. Not to mention that we may pay almost 85 million Euros this year to "Apele Române", for the treated water, since we had a better hydraulicity in 2014 than in the previous year.

Following the optimization of the operating costs and the implementation of some measures to improve the efficiency of output and sales, Hidroelectrica will succeed in repeating last year's financial performance, in other words turn out a profit of 200 million Euros.

This proves the real potential of Hidroelectrica and of state-owned companies in general. Companies that the state is a shareholder in, can generate stability, profits and trust too. Provided the management of these companies is entrusted to people who come recommended by their professional skills, morality, management abilities and not by their political party membership.

Reporter: Did the DIICOT ask for information from you on the criminal case it opened concerning the retooling of the hydroelectric plant of Porţile de Fier I?

Remus Borza: I have made available to the prosecutors' office the requested documents. Given the identical operating methodology, the awarding of the contracts, the commercial terms, the price, the non-compliancy in the exploitation activity which appeared after the retooling, I am expecting the prosecution to extend to the retooling of the Porţile de Fier II plant of the 5 plants of the Lower Olt.

Reporter: Thank you!

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