bne -

As CEZ management gear up for what could be a stormy annual shareholder meeting on May 13 in Prague, it's an opportune time to ask how long the CEO of Central Europe's largest utility, Martin Roman, can survive in his post. Given recent events, probably not for as long as he'd like.

Roman was last re-elected CEO and chairman of the board in February 2008, and is due to hold the post for four years until 2012. However, Czech politics have been in turmoil since the centre-right coalition led by former Prime Minister Mirek Topolanek's Civic Democrat party (ODS) fell apart in March after four defectors from the minority coalition sided with the left-wing opposition Social Democrats (CSSD) and Communists. The two major parties, the CSSD and ODS, have agreed to form an interim government headed by the current Czech Statistical Office head Jan Fischer until fresh elections are held by October 15 at the latest.

bne has learnt that CEZ board members generally believe there won't be any management changes at the 70% state-owned utility until at least after October's general elections, and probably not until next year. How, they ask, could a caretaker government find the strength to unseat Roman when you need total consensus on the issue? And in any case who would replace him? New elections will surely provide some answers to these questions. Even so, this current instability in the distribution of power in the Czech Republic is still troubling for Roman, who as head of the Czech state's crown corporate jewel - which, as one observer puts it, is the fuel that feeds the entire elite - needs wide political backing to remain in his job. That political support is rapidly falling away - and he knows it.

A sign of how troubled Roman is by the changed circumstances was a desperate campaign that CEZ launched on April 27 with full-page advertisements in major newspapers imploring customers to sign up for CEZ's fixed-rate electricity pricing scheme before the special offer expired at the end of the month. Unfortunately, one of those same newspapers, Hospodarske Noviny, gleefully reported the next day that just 3,900 customers since the start of the year had bought CEZ's argument that this chance to lock in the electricity prices for 2010 makes financial sense for households and signed up for the scheme.

While one could argue that CEZ management was merely trying to bash electricity competitors like Germany's E.On (whose similar scheme was rubbished in the ad) and appeal directly to their customers, some observers claim the only reason that Roman would launch such an astonishingly futile (the offer expired a few days later) and expensive campaign would be to take control of the news agenda and change the story from the rash of terrible headlines lately about him and his stewardship of CEZ.

Bad press

Much of these headlines have to do with what Czech households care about most: their rising electricity bills and CEZ execs' rising pay packets.

The two are inextricably linked - a fact startlingly highlighted by the outgoing finance minister, Miroslav Kalousek, at the end of April when he made a pointed remark about how, relatively speaking, it has been Czech government policies, rather than management decisions, that has propelled CEZ's share price and made the top managers so rich. His salary may be modest, but Roman in January 2008 exercised his share options under a very generous management option scheme which netted him CZK677m (around €25m at today's rate), the largest such bonus in the company's history. On May 2, the Mlada fronta DNES newspaper carried on its website an investigation into how much CEZ's top managers paid themselves in bonuses in 2008 and came up with the astounding figure of CZK2.2bn (€82.9m), of which Roman claimed about a third, some CZK700m.

So what did Kalousek mean by his comment? It was a direct challenge to the widely held belief amongst analysts, the press and investors (mostly foreign) that it's CEZ management who have steered the company into the dominant position it holds today in Central Europe, and in doing so raised it's share price from the CZK100 level it bobbled about at until 2003 to the record high of CZK1,387 hit before the crisis struck in the autumn of 2008 (the shares are now trading at CZK844).

Kalousek has a point. The share price really kicked off when the government decided in 2003 to follow a management plan to create a vertically integrated national champion by bundling coal mining, generation, distribution, sales and trading assets, which was followed by the decision to manage the company as a commercial enterprise, ie. generating profit for shareholders rather than social benefits for households in terms of low electricity prices.

This new national champion then found itself the beneficiary of two major decisions taken by previous governments and paid for by the Czech taxpayer. The first was the controversial and publicly unpopular decision to finish the construction of the nuclear power plant in Temelin, which, together with the older nuclear power plant in Dukovany, today generate the cheapest electricity in the CEZ generation fleet, thus creating the biggest margins for the group. Second, was the decision to invest some CZK50bn-60bn of taxpayer's money in environmental programmes aimed at reducing pollution emitted by CEZ's predominantly brown-coal fired power plants. This meant that as the Czech Republic geared up to join the EU in 2004, its plants already met most of the bloc's environmental standards. "These subsidies CEZ received meant that it did not have to invest its own capital, which could then be used for acquisitions," notes one analyst, who declined to be named, referring to the huge shopping spree the company embarked on from 2005 that has netted assets in almost 10 countries in Europe.

But that wasn't all; the Czech government has since set up the domestic electricity market in such a way that it benefits CEZ to the detriment of virtually everyone else. In 2007, the Prague Energy Exchange was established, the first such power trading market in CEE. This might seem like a step toward a deregulated electricity market, but because CEZ is a virtual monopolistic power producer (responsible for about 80% of Czech output), it is able to auction about a third of its output on the exchange. What has happened is that Germany next door, a large importer of electricity and one that produces its own at a much higher variable cost than the cheap CEZ stuff, has bought up this surplus power, causing prices on the exchange to converge at a very fast pace with German prices. "CEZ then uses this spot price achieved on the exchange to negotiate their bilateral supply agreements with local distribution companies and large businesses, who then pass those costs on to consumers," says the analyst.

Indeed, distributors CEZ and Prazska energetika increased the price of electricity for households by an average 9.9% from January, which followed a similar rise in 2008. Such price rises, as well as the growing disillusionment with CEZ management and their bonuses, are becoming a major campaign issue for the next election.

The head of CSSD, Jiri Paroubek, whose party looks reasonably well placed to win the elections in October, is set to make high electricity prices a central part of his election campaign. CSSD is using an organisation called SPONEL (Consumers Against Immoral Electricity Prices) as a means to whip up support. In mid-April, Jiri Cunek, leader of the Czech Christian Democrats (KDU-CSL), the junior partner in the outgoing coalition, said he would propose to PM-designate Fischer that his caretaker cabinet push through the lowering of electricity prices using existing law.

Given it's the Ministry of Finance, as CEZ's largest shareholder, that gets to pick the CEZ board, a battle was fought between the various political parties - and CEZ - over who would assume the post of finance minister in the new caretaker government. Eventually, the parties settled on Eduard Janota, a technocrat who served as Kalousek's deputy responsible for drawing up budgets and managing state finances. Able as he is, analysts say he won't have the balls to stand up to Roman at the AGM, but the issue of bonuses will nevertheless dominate proceedings, as one of the items on the agenda will be to alter the way that the bonuses for senior staff at CEZ are arrived at. Currently, CEZ is given a bonus amount to share around and Roman gets to choose how to divvy it up; in future the finance ministry will decide how much the CEO will receive.

Of course, politicians need to politick and taking some well-aimed shots at corporate fat cats before an election is part and parcel of any democracy. But adding to all this noise is that fact the global economic has savaged many of the Czech Republic's tycoons, many of whom would like to see "their man" sitting in the top CEZ chair. "There's a lot of wounded animals out there and, as everyone knows, such animals can be dangerous and unpredictable," says one seasoned observer of Czech politics. Et tu, Brute?

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