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October 2, 2022
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Strategic thinking vs short term profit

Minority shareholder Fondul Proprietatea publicly requested a new procedure for the selection of a new Board of Administrators to SN Nuclearelectrica SA following the company’s announcement to convene the Meeting of Shareholders on December 9th, 2016 in order to renew the mandate of its current members of the Board of Directors. To support its claim, Fondul Proprietatea professed a series of accusations aimed at the current members, among which the decrease in SNN share price, decreasing profit in 2014 and 2015, the lack of measures to counteract both share price and profitability decrease.

SN Nuclearelectrica SA answered Fondul’s accusation by bringing upfront a detailed report on the energy market and its impact on the company, its financial results during the 2013-2015 mandate period compared to the previous period, capital market related impacting data, investment projects and their benefits on the company. Listed or not on the stock exchange market, SN Nuclearelectrica SA remains a strategic national company covering approximately 20% of Romania’s energy needs. The main feature of the company is nuclear safety and sustained inherent investments plans. What is it more important: having a sound producer, internationally recognized for its operational performance, a profitable one, as the figures point out or an irresponsible risk taker in order to maximize, to the expense of nuclear safety, the short term profit of a demanding shareholder?

Should such a company have a responsible, accountable management with a balanced hands-on approach on all aspects of a nuclear producer, active in terms of market change to facilitate further company growth or should it have a strongly compliant management, tailoring the company’s objective priorities to fit repeated demands of short term profit?

Nuclearelectrica says “FP stated publically on several occasions that it is interested in the maximization of the gains for the shareholders, and starting from this premise, it constantly opposes any long term project of the company, especially Cernavoda NPP Units 3 and 4 project, stating that this project would diminish the shareholders gains. Although, the strategy for the development of the project clearly states that the two units would bring considerable income for SNN through the capitalization of the existing assets which currently don’t generate any income, operation revenues based on an O&M contract, nuclear fuel supply revenues and dividends, revenues which undoubtedly will be reflected in the shareholders gains, FP had never publicly presented any data related to their position. SNN argues that Cernavoda NPP Units 3&4 project represents a healthy development solution for the company with long term benefits.”

The common approach whenever the issuer struggles to change negatively impacting legislation and fiscal regime is for the shareholders, at least the ones holding a large number of shares, to support the Board of Directors and/or the General Manager in such an approach. It makes a lot of sense since the battlefield zone is value for both the company and all its shareholders.

Nuclearelectrica explains “In the current market frame, a correct approach towards the issuer and the shareholders would be a policy supporting the efforts of the company’s management to promote legal changes in the benefit of SNN. Practically, FP as a legal person shareholder with a large exposure on Romania’s energy market, could have supported together with SNN, to the benefit of the shareholders, the following efforts:

  • The annulment of the export interdiction which discriminates the Romanian energy producers in comparison with the competition in neighboring countries and the energy traders;
  • The adjustment of the energy transport tariff, which is currently differentiated on geographical regions and which has the highest cost for the Dobrogea region, placing SNN on a disadvantageous position compared to other producers in different areas;
  • The change of the legislation considering the fact that SNN is owner of a production and a supply license but faces difficulties in the interpretation of the legislation regarding the supply of electricity to end consumers. On one side (as a producers), Nuclearelectrica is obliged to sell the entire available quantity on the centralized market, and on the other side (as supplier), Nuclearelectrica has to right to supply energy. Energy supply also involves personalized offers towards end consumers, which contradicts SNN’s obligation as producer;
  • The reduction of excessive regulations which make it impossible to ensure the continuity of sales during the outage periods;
  • The correction of market failures such as: Day Ahead Market which was a quota of over 50% out of the total forecasted consumption, being a main market and not a marginal one as it was designed to be; the green certificate trade mechanism which put direct and unjustified pressure on the trading price of clean energy, thus affecting the formation of the price on this market segment and consequently the rest of the market etc
  • The increase of the flexibility of the mechanism and platforms used by producers to trade their energy, which at present are extremely difficult and affect the liquidity of the market.”

Nuclearelectrica adds: “SNN is an energy producer, with a constant production capacity, limited to cca. 1.400 MWh installed capacity by the technical characteristics of the two operating units; thus, the production cannot be increased in order to compensate the major energy price decrease during 2013-2016.

 

SNN is already operating at the highest standard of nuclear excellence which implies a capacity factor already above the average in the nuclear industry which places the two units on the top positions worldwide, thus the increase in the net production of the operating units is not possible. The decrease of production, however, is possible if SNN doesn’t take the adequate operation and maintenance measures, doesn’t ensure the necessary investments to maintain the operating capacity considering the natural wear of the units.

 

At the same time, the management is constantly considering long term objectives, even if this means the renunciation to short term results: an example is the decision to perform a major investment work during the planned outage of Unit 1 in 2016, with benefits on the long term for the shareholders, which required an extended outage period of an extra 20 days, and thus decreased production and revenues in 2016 but with benefits in the following period due to avoiding a future production decrease caused by the reduction of the thermal transfer performance. This is an eloquent example which indicated the compliance to the nuclear industry best practices which can be comprehended by anyone willing to do so. There are countless examples in the nuclear industry, when delaying certain investments out of the management’s selfish interest to cash in short term profits lead to disastrous consequences. Possible the investors were satisfied, but jeopardizing future results.”

 

Definetely, the market context with its massive decrease in energy prices has a significant impact on the financial results of the company, the largest share of any producer’s revenues being generated by energy sales.  This situation applies to all producers in the market. Nuclearelectrica is no exception. When prices, regardless of the market or commodity plunge, the first to take the blow are those specific market players. The same happens with oil, gas and so on.

Nuclearelectrica says it “has developed new energy sale strategies adopted to the new market context, SNN’s energy sale prices resulted from the sale of energy being constantly above the average market price, thus, the necessary internal measures for partially counteracting the price decrease were adopted, implemented and with optimum results compared to the market context, but insufficient to offset the major price differences between 2012 and 2016.”

 

When it comes to profit, figures speak for themselves:

  • 2011 – net profit 83 mil. lei.
  • 2012 – net profit 20 mil. lei
  • 2013 – net profit 427 mil. lei
  • 2014 – net profit 131 mil. lei
  • 2015 – net profit 147 mil. lei

 

Nuclearelectrica further explains “FP refers to the decrease of the profit during 2014-2015 after the historical profit obtained in 2013. In order to have a clear view of the evolution of the net profit during 2013-2015, considering the price decrease, it is necessary to present the comparison to the year prior to 2013-2015 period. Judging alone on the role of the current Board of Directors to increase the profitability of the company, then, from this point of view, one can clearly notice that compared to the period prior to 2013, period characterized by high energy prices, the net profit for the period 2013-2015 increased, although the differences in the energy prices are significant. The decrease of the profit during 2013-2015 reflects mainly the decrease of the market price, a clear dependence correlation existing between the two. FP’s statement regarding the decrease of the profit during this period does not present any causes and does not permit a comparison with the previous years in order to position the results of the current Board of Directors compared to the previous status of the company, before their mandate. A fair and objective assessment can be performed only in correlation to the previous period and to the market.”

Nuclearelectrica concludes “One of SNN’s Board members was appointed at the proposal of FP. Thus, FP had the opportunity to present proposals and growth strategies for SNN, either directly or indirectly.”

The company continues to be a strong advocate for the correction of the energy market inbalances, for more flexibility and opportunities for base load clean energy producers, while adopting a proactive and adaptable internal policy focused on diversification, cost prioritization and efficiency while maintaining high performance in production and nuclear safety. The clash of opinions and interests between Nuclearelectrica and its minority but significant shareholder point pricesely to the existence of a fine and at times unstable line among many Romanian state owned companies listed on the stock exchange. Nuclearelectrica, more than other companies, has to combine two essential roles: the role of a nuclear operator with specific and strict regulations regarding nuclear safety, maintenance, investments and the role of a capital market enterprise expected to provide to the needs of the shareholders. Judging by the company’s reports and its evolution during the past years, one can conclude that SNN has a few lessons to teach about adaptability and performance in a challenging context.

 

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