Bogdan Nicolae Badea: Hidroelectrica’s historical records and prospects for 2019

While 2017 was a year of records, in 2018 Hidroelectrica recorded new historical performances. The President of the Management Board, Mr. Bogdan Nicolae Badea, details the restructuring and streamlining process recently underwent by the company, as well as its prospects for the following period.

Hidroelectrica is leader in electricity production in Romania and the main supplier of technological services necessary in the National Power System (NPS), being a vital company for national energy security.

Dear Mr. Bogdan Badea, you have been managing the company for relatively little time, since July 2017 only, but your experience in the energy sector allows you to make an objective assessment of the economy in general and of the national power system in particular. How do you assess the latest developments on the energy market at domestic and European level?

Bogdan Nicolae Badea: I wouldn’t want to venture into making considerations on the economy in general. I believe there are people better placed than me who can make such analyses. As far as the situation in the energy sector is concerned, this is an interesting discussion. If you had asked me this question in early December last year, I would have told you that, at least from the perspective of energy producers owned by the Romanian state, things look very well. Prices on the free market and profits we have obtained over the past years allowed us to think about investments very seriously. We, at Hidroelectrica, have proposed shareholders a business plan worth around RON 5.4 billion, for the following five years. It is a very ambitious plan, to the extent of company’s power, a plan that would have sold the issue of historical investments and would have ensured the prerequisites for listing on the stock exchange.

But the beginning of the year has put us in the situation of rethinking the business strategies and plans. We are in a moment of uncertainty, because we are waiting to see the impact of the Romanian Energy Regulatory Authority (ANRE) regulations in terms of implementation of GEO 114/2018. We are concerned by the prospects of going back to the regulated market and a profit margin that would mean abandoning the investment plans and the ambitions of becoming players on the regional energy market. We recall that Hidroelectrica distributed annually 90% of its profit to shareholders, the dividends distributed to the Romanian state amounting to RON 829,129,927 in 2016, RON 908,165,272 in 2017 and RON 1,440,000,000 in 2018 respectively.

The national energy system is old and investments are absolutely necessary. Romania has, in theory, an installed production capacity of over 21,000MWh. The problem is that – in practice, difficulties may occur when the market requests over 9,000MWh or even below this value, as we have seen lately. From a technical point of view, the solutions to this problem are the same as those mentioned for a long time in the system: establishing new production capacities, increasing/upgrading the old production capacities – where it is possible, retrofitting, supplementing the interconnection options.

At the end of last year, we managed to commission Hydropower Unit II at the Beresti Hydropower Plant and Hydropower Unit I at Calimanesti after extensive upgrading works. These are investments that give a new life to hydropower developments. It is very important to permanently make such works in order to secure the existing capacities. We can think about expansion only in parallel with securing the current portfolio.

 

In short, what is the company’s business card, in data and figures? How does Hidroelectrica position itself in terms of interconnections on the regional market?

Bogdan Nicolae Badea: Hidroelectrica is the main pillar in terms of security of the national energy system. It is, as we have proven in the recent years, the company called when the situation requires it. I want to recall that the company supported, last spring, in certain moments, over 50% of the national electricity consumption. We have in our portfolio 208 hydropower plants (including 5 pumping stations with energy role), with an installed power of 6,444MW. From a financial point of view, Hidroelectrica has beaten all its own records in terms of profitability: profit of over RON 1.63bn in 2007, figure exceeded by the 9-month situation in 2018. We produce about 14TWh, in an average hydrological year.

 

In 2017 Hidroelectrica ranked first in the top of the most valuable companies in Romania, with some notable records. What did the restructuring and streamlining process, which led to these results, consist of in particular?

Bogdan Nicolae Badea: Hidroelectrica was evaluated in 2017 to around EUR 3.57bn, which placed it, at the time, at the forefront of the most valuable Romanian companies. The road to this moment has been difficult and involved, as you know, crossing a period of deep restructuring and streamlining.

When we took office, we proposed ourselves to implement a strategic management leading to the sustainable development of the company, objective we believe we have successfully achieved, if we take a look at what Hidroelectrica represents today. We acted with priority towards the harmonization of the staff number with the necessities of the company and towards the efficient use of all resources. This means we hired in areas where we considered it was necessary to strengthen the company. We mainly consolidated the technical, design departments etc. We optimized the internal processes, so as to reduce bureaucracy and boost decision-making and accountability. We paid an increased attention to procurement processes, so as to ensure that prices at which we bought products and services were the correct ones.

We also focused on maximizing production and maintaining a high profit level. Thus, we redesigned maintenance plans, for example, so that power production facilities and equipment be available when they are needed and we withdrew them for turnaround mainly in periods when we know, from experience, that the power system isn’t so loaded.

We are interested in introducing modern technologies, which increase efficiency and yields. We are open to innovation, to new.

 

Performances continued in 2018… how did you end the year? What is the total production (from how many hydropower plants, including pumping stations)? – turnover, estimated net profit at the end of the period etc.

Bogdan Nicolae Badea: It is premature to estimate the financial results for the entire year 2018. What I can say now is that in 2018 we produced over 17TWh, and in November the turnover amounted to around RON 3.9 billion. Under these circumstances, we expect to exceed the historical profit obtained in 2017.

 

The plan for 2019 also includes the diversification of energy generation sources. Do you currently have established the purchases you plan to make?

Bogdan Nicolae Badea: We are interested, as I have stated before, in green production. But we need to consider the impact of GEO 114/2018 and especially that of the related ANRE Order. We want to integrate in the asset structure with priority such energy production sources: wind or solar parks, biomass etc. We could do it either by developing own projects, or by acquiring existing ones. We prefer the second option, because in this way we can burn some stages, overcoming some bureaucratic problems and can advance more quickly towards what we have planned. We pay great attention to what the market has to offer, not only the domestic one, but also the regional one.

The business plan is currently under review.

 

What is the current status of the project blocked at the end of 2017 by the Bucharest Court of Appeal, which definitively cancelled the construction permits issued by the county councils of Gorj and Hunedoara for developments on Bumbesti – Livezeni sector of Jiu River? We are talking about three hydropower plants (Bumbesti, Dumitra and Livezeni) that are almost completed…

Bogdan Nicolae Badea: It should be noted from the start that Livezeni – Bumbesti project is at a very advanced stage of development: it is completed over 90%. Basically, it already exists physically, as a result of investment made in time and which amounts to over EUR 150 million. Moreover, it is a project declared ‘of public utility’ under Government Decision. Undoubtedly, it is a project that needs to be completed, once bureaucratic obstacles have been overcome. We are in full process of reviewing the environmental permit in order to bring it into line with current requirements involving, inter alia, the construction of a fish ladder to ensure the migration of aquatic fauna.

Also, in December last year, Government Decision no. 1032 was issued, on expropriations allowing the implementation of double circuit 110kv overhead line that will connect the Bumbesti hydropower plant to the National Power System.

More recently, we have been facing another problem, which took us by surprise. After discussions of more than two years and mediations regarding Dumitra hydropower plant – a completed investment, E-Distributie unilaterally decided, in January 2019, to terminate the connection contract. This happened after repeated attempts to change the technical solution established under the Technical approval for connection (ATR) and to increase the connection tariff. Moreover, there have been several inconsistencies between the site initially established under the ATR and the technical design that had to be developed later. Thus, at this point, we are in the situation of having no time estimate for putting the objective into commercial operation. We are analyzing very seriously the option of suing ENEL for the hostile behavior towards Hidroelectrica, as well as the losses suffered by the company.

Unfortunately, the situation is not singular – we have a similar problem with the same distribution operator Enel in the case of Bretea hydropower plant. There, the situation is even more absurd, the power plant being connected to the system since 2017 based on ATRs and contracts signed with ENEL. After commissioning, ENEL refused to issue the connection certificate, thus preventing Hidroelectrica from obtaining market prices for energy produced. We referred to issue to the National Regulatory Authority for Energy but no solution was found for more than a year to solve the situation.

We seriously wonder whether the hostility shown by Enel is part of a wider plan to sabotage the activity of Hidroelectrica, which is even more worrying as the National Power System has been facing lately a clear deficit in terms of production.

 

What were the main challenges/obstacles of 2018?

Bogdan Nicolae Badea: The main obstacles in making Hidroelectrica’s investments are, in general, of bureaucratic or legislative nature. We are facing contradictory laws or difficulties in advancing with certain projects because we are blocked by petty bureaucracy or by the opposition of local authorities. Sometimes it is frustrating to see what projects worth tens of millions of euros stagnate because a forest district, for example, refuses to issue of a document imposed by Government Decision. And this is a situation much more frequent than you might believe.

Also, the public procurement legislation is still impenetrable and involves a lot of time to go through certain stages, which cancels our efficiency as compared to what a private player can do. Basically, to make an investment, our work is twice more intense and requires a much more detailed planning than in the private sector.

 

Will the company be listed on the stock exchange this year, or there are changes in this regard?

Bogdan Nicolae Badea: The decision to list the company on the stock exchange exclusively belongs to shareholders. What we can do, as management of the company, is to prepare Hidroelectrica for this scenario. We are interested in bringing before investors a profitable, structurally optimized, healthy company, able to develop. This is our role, those who are part of the management. Regarding the opportunity to list it and choosing the most favourable moment, as I said, it is shareholders’ decision.