Why Hidroelectrica’s share price is stagnating

The idea for this post came to me after reading a recent article in Ziarul Financiar (Financial Daily) that attempted to answer the question in the title above. The article offered as its main explanation the lack of significant investments, comparing the company to other energy companies such as Petrom and Romgaz.

I believe there is more to it than that. After all, investments should not be an end in themselves, but a means to achieve the objectives that a company has set for itself. And when we talk about companies operating in the energy sector, given the complexity of the projects and the time needed to complete them, we are basically talking about long-term objectives.

This brings us to the extremely important question that I believe Hidroelectrica still needs to answer to its current and potential investors. Which are the company’s long-term objectives, or rather, which is the vision of the company’s management and the Supervisory Board regarding the future of Hidroelectrica? And I believe that the company’s name is far from providing a self-evident answer.

A credible and relevant answer to such a question is essential for the company’s long-term success and for the predictability that investors value so much. Because, let’s face it, a company so dependent on the hydrographic and rainfall regime does not offer much predictability. And in the future, it will probably offer even less.

What Hidroelectrica needs to explain very clearly to investors is what the expected effect of climate change will be on Romania’s hydrographic regime and how the company intends to hedge itself from such risks by diversifying its energy sources. 2025 offers a glimpse of the challenges Hidroelectrica will have to face in the future if it fails to diversify its energy sources.

The vision, long-term objectives, and associated strategy that investors expect from the company should explain in concrete terms what the company’s renewable energy mix will look like in 10 years, the steps to be taken to achieve it, the milestones, and, finally, the value of the expected investments/acquisitions and their source of financing.

This long-term strategic planning process would also be essential from the perspective of the discussion regarding the sale of new Hidroelectrica shares on the stock exchange. Depending on the value and structure of the investments, it could be decided whether the shares will be sold by the Romanian state to cover budgetary expenses, whether the shares will be issued by Hidro to finance ambitious energy diversification projects included in the strategy, or whether dual objectives would require a mixed approach.

Another issue that probably concerns investors is the extent to which accepting an unlimited number of retail customers is a business decision or whether the decision is governed by other non-economic criteria such as social protection. This question is all the more legitimate given that statements regarding limiting the number of retail customers at a given time or the need to increase prices have been made publicly by Hidroelectrica representatives at some point in time, only to be subsequently withdrawn. This is concerning because such statements are not without economic sense.

Hydroelectric power plants with reservoirs that are not located on large rivers are designed to cover peak loads, such as those in the evening. If you look at the graphs on the Transelectrica website, you will see how, starting in the evening, in the absence of wind, hydroelectric production begins to increase and then decreases after 10 p.m. This is also the case for Hidroelectrica, with the exception of the Portile de Fier power plants, where the flow of the Danube ensures non-stop electricity production for most of the year. However, even in the case of the Danube power plants, there are fluctuations in production during dry seasons.

The problem is that the population and industry do not consume energy only during peak hours, but throughout the day, in varying amounts. So we have a producer designed to cover peak consumption, which is increasingly faced with the challenge to cover the consumption of an ever-growing customer base, even outside peak hours. Moreover, we have an electricity producer that has to cover consumption peaks during increasingly hot and dry summers in the processing of… water.

In the absence of a clear strategy for diversifying into complementary energy sources, Hidroelectrica will be forced to purchase more and more energy from other non-hydro producers, which is already happening. The question to which there seems to be no clear answer today is: to what extent are these purchases being made at a loss in order to keep the prices offered by Hidroelectrica to the population low?

This leads to another topic that investors are watching very closely: the independence of Hidroelectrica’s business decisions when it comes to energy prices, dividend distribution, investment plans, or their financing structure.

For Hidroelectrica’s share price to resume its growth, the quality and independence of its governance will be essential. This governance should be strictly focused on financial and operational performance, based on a long-term vision. Hidroelectrica should be allowed to operate solely on the basis of maximizing performance, and nothing else. Unfortunately, for too many companies in Romania, the label of “strategic” has been a smokescreen for poor governance, shielding them from the scrutiny of private investors and preventing them from raising capital on the market.

For this to happen, it is essential that executive and supervisory teams have long and predictable mandates that encourage long-term thinking and the undertaking of complex, long-term projects.

Hidroelectrica has all the ingredients necessary to be a highly successful company. However, this is not a given. And the share price suggests that investors are waiting for a clear long-term vision and strategy.

Note: The pension funds managed by BCR Pensii SAFPP are shareholders in Hidroelectrica.