Plans for higher water taxes threaten to push down Hidroelectrica valuation ahead of IPO

Romanian hydropower group Hidroelectrica could pay 55% higher taxes for the water it uses under amendments promoted by Energy Minister Virgil Popescu and Environment Minister Tanczos Barna, currently under debate in the Chamber of Deputies.

Should the proposal be accepted, it would hike Hidroelectrica’s expenses at a time when the company is preparing to list its shares on the Bucharest Stock Exchange within the next year. Any decision with a negative impact on its financial results could lead to a lower valuation for the company. 

The higher royalties will be paid by all hydropower companies in the country, out of which Hidroelectrica is the biggest.

The company will pay RON33 (nearly €6.8) for each MWh of electricity produced in its hydropower plants if the parliament passes the amendments.

Currently, the company pays a royalty calculated based on the amount of water used, resulting in an average level of RON21 per MWh produced, according to Fondul Proprietatea (FP), Hidroelectrica's minority shareholder with a 20% stake.

FP issued a statement against the government’s plans, saying it is "deeply concerned" with the "unnecessary and unreasonable increase" that pumps money in the pockets of "another state institution" — Apele Romane (ANAR) — which "has not improved its services" therefore does not deserve the money.

"Fondul Proprietatea calls the members of the Chamber of Deputies to not approve the proposed water tax and resubmit the law project for a detailed analysis," according to the statement.

According to Fondul Proprietatea, the water tax paid by Hidroelectrica will increase from about RON350mn to almost RON528mn in an average hydrological year, under the new royalty regime.

“Why are we so concerned about this? … it reduces the profitability of company and dividends to shareholders — the Romanian state and Fondul Proprietatea. In a company that’s currently being prepared for an IPO, you are depressing the Ebitda as well as the net profits, which are key measures shareholders use in determining the value of the company,” Fondul Proprietatea's manager Johan Meyer said during a conference call with journalists on March 24. 

“Moreover, having such an arbitrary and significant increase imposed on a company through legislation sends completely the wrong message to existing and potential investors because at any time they can feel that returns they expect to generate from the company can be severely depleted by a change over which they have very little influence.” 

Meyer argued that Hidroelectrica's activity is already burdened by several legacy ongoing investments whose main purpose is the rational and safe management of water resources, which used to belong to National Agency Romanian Water (ANAR).

In 2020, Hidroelectrica reported RON3.5bn revenues and a net profit of RON1.45bn, resulting in a net profit margin of 41%.

Hidroelectrica's main assets are the big hydropower plants built during the communist regime that, from an economic perspective, are natural monopolies.