Clare Nuttall in Bucharest -

Romania’s largest electricity producer Hidroelectrica posted record profits in the first quarter of 2015, after carrying out a far-reaching restructuring programme. The company is now planning to hold an IPO next year, but can only do so after it exits insolvency procedures.

State-controlled Hidroelectrica announced on April 20 that it had achieved gross profits of RON405mn (€91.5mn) in the first quarter of 2015, more than double the RON178mn in the same period of 2014, which according to a company statement was the most profitable year in its history.

The company attributed the increase in profits partly to higher electricity production – up 37% on year – but said the major factor was the introduction of new management. Hidroelectrica is one of several major Romanian state-controlled companies to have had new private sector managers installed as part of a government drive to improve performance.

While the average price for the electricity sold by Hidroelectrica, which produces around 30% of Romania’s power, decreased in 2014, the company achieved a wider profit margin per megawatt hour as it reduced production costs. This followed a major restructuring programme in recent years that involved cutting the number of subsidiaries, laying off workers and selling off non-core assets.

However, the most important part of the turnaround at the state power company has been cancelling contracts signed under previous managers, under which it sold electricity at a loss to private traders. This has been the most difficult part of the restructuring and forced the company back into insolvency in 2013, delaying preparations for the planned IPO.

Smartest guys in the room

Hidroelectrica first entered insolvency in mid-2012, exiting in July 2013 after cancelling 11 loss-making contracts with private traders. These contracts are estimated to have resulted in lost profits of around €1.5bn for the company between 2002 and 2012. However, Hidroelectrica later re-entered insolvency after several of the power traders launched lawsuits challenging the decision to terminate their contracts.

Progress was finally made in early 2015, when Hidroelectrica won several court cases against the private power traders, which the company has dubbed “smart guys”.

In the most significant ruling so far, on February 12 a Bucharest court ruled in favour of Hidroelectrica in its case against a group of private power traders and the Sindicatul Naţional Petrom-Energie trade union. The court ruled that the traders – Alpiq Romindustries, Alpiq Romenergie, Alpiq AG – and the trade union should pay costs incurred by both Hidroeelctrica and Romania’s Fondul Proprietatea, which owns 19.94% of the company. “It was a tough fight. The process was difficult and delayed the obstinacy of the three Alpiq traders,” said the company’s administrator Remus Borza in a statement issued after the verdict. “On the other hand, the solution was predictable because Hidroelectrica was really in a desperate financial situation... The reorganization of the company and saving it from bankruptcy was not possible without denouncing the contracts with energy traders or without renegotiating disadvantageous contracts and identifying energy sales strategies to ensure the profitability of the company.”

Similar rulings were made in other cases in January and February, leaving Hidroelectrica better placed to press on with improving the business further this year. It is now planning to boost investment, and is considering expanding within the region. It expects to generate profits of around €300mn this year, provided it can maintain a high level of production.

The next big question for Hidroelectrica concerns the timing of its planned IPO, which cannot take place until six months after it exits insolvency procedures.

Greg Konieczny, executive vice president of the company managing Fondul Proprietatea for the government, Templeton Emerging Markets Group, told a press conference in January that no IPOs of major companies from the fund’s portfolio are expected this year.  Given that Hidroelectrica is still under insolvency procedures, Konieczny told journalists that even an IPO in 2016 “could be very challenging”.

A source close to the company confirmed to bne IntelliNews that Hidroelectrica is expected to exit insolvency in the autumn of 2015, which would pave the way for an IPO in the first half of 2016.

Hidroelectrica’s IPO will be the latest in a series of share offerings of major state-owned energy companies that has helped lift turnover on the domestic stock exchange and raise Romania’s profile among international investors.

The first to list post-crisis was Nuclearelectrica in 2013. This was followed by the IPO of natural gas company Romgaz later in the year, in which the government raised $520mn through the sale of its 15% stake in the company. The most substantial IPO was electricity distribution company Electrica, which started trading in Bucharest and London in July 2014. This raised RON1.95bn through the sale of a 51% stake in the company. Hidroelectrica’s upcoming IPO is expected to be on a similar scale to Electrica’s.