Alternatives & Analyses: From Lukanov to Borisov – the oligarchization of the Bulgarian energy sector

At the very start of Bulgaria’s transition, the then PM Andrei Lukanov and the Communist party nomenklatura designed and implemented a plan for control of the state economy and the public finances while in nominal opposition.

Among the steps undertaken were installing loyal party cadres at the helm of state-owned enterprises, virtually the whole economy, blocking or making their replacement an uphill legal battle.

The second tier of this gameplan was transferring public funds to offshore companies and western banks (Deutsche Bank playing a prominent role) beyond the elected Government’s control.

Finally, Plan “B” included hastily organized ‘mutri’ (or “thugs” in Bulgarian – sport schools graduates turned criminals) groups under the direct control of secret service officers and Bulgarian Socialist Party (BSP) nomenklatura. Their prime task was to oversee money transfer networks, blocking criminal investigations and action by the state’s law enforcement system.

Borissov’s upgrade to Lukanov’s plan “B” includes an unprecedented mass transfer to private companies under oligarchic control of budget funds in the months preceding the April 4th elections – more than 5 billion euro, with and without public procurement procedures. This unprecedented waste of public asset wealth will effectively tie the hands of the next Government and force it to raise taxes.

The impending implosion of public finances is the natural outcome of endemic corruption and the irretrievably lost time for reform, which leaves only the worst scenarios on the table.

The energy sector comes first in the line of time bombs impossible to defuse. The less visible part is the collapse in the Bulgarian state energy companies’ capitalization, most of which could hardly pass a rigorous asset quality review test and meet the criteria of a ‘going concern’.

In many aspects, the situation closely echoes 1997, when the only options left after Videnov’s Government were asset fire-sale or liquidation.

The Government is deepening the crisis through inaction. Even though the existential threat to the state-owned TPP “Maritsa-East” -2 persists, millions of leva in cold reserve capacity end up with energy oligarchs Dogan and Kovachki.

The new green “hydrogen” theme is an attempt in vain to add modernity to the obsolete National Implementation Plan for energy reforms – hype, little substance, serving only the same oligarchs secure access to EU transformation funds.

In the meantime, plan “B” becomes operational with the former head of the parliamentary energy commission’s pending appointment as a CEO  of the Bulgarian Energy Holding.

Picking a GERB party functionary instead of professionals to lead BEH reveals PM Borissov’s attempt to hedge his grip on cash flows against election loss. Borissov and Dogan need a behind-the-scenes control mechanism over the state companies’ cash flow and private security groups guarding their newly accumulated wealth and networks of influence.

The model depends on the captured law enforcement and judicial system to shield the ‘Gang of Four’ – Borisov, Dogan, Peevsky and Geshev, from retribution. Few Bulgarians can imagine ​​the depth and scale of the deep state built over the last ten years of Borisov’s reign.

The destruction of value in the energy sector is immense.

Even Kozloduy NPP’s relative success should be qualified against the legacy of full asset amortization, allowing it to reflect only operational costs in electricity’s end price.

The artificially low nuclear energy price results from a devil’s play with low corporate nuclear risk insurance, times below European standards, which shifts the risk from the corporate to the state budget.

According to the Bulgarian Energy Holdings’ consolidated financial statements published on its website, the holding has failed miserably in its primary task to develop the companies, enhance their competitiveness, increase their asset base and market share. Instead, its main accomplishment is redistribution of profits and cross-subsidization, debt buyouts which proliferate the most considerable destruction of equity in Bulgaria’s industrial history.

None of the BEH companies has invested in renewables, in modernization programs, in oil and gas upstream, in CCS and gas-fired generation, in acquisitions abroad that could optimize the cost and value chain.

Reading the BEH group of companies’ financial statements since 2013-2014, the lack of consistent strategic vision or systematic management line becomes apparent.

Investments made often end up as sunken costs. 

The grandest spending – totalling 6.5 billion leva – by Bulgartransgaz in Balkan Stream and by NEK in the Belene NPP follows perverse geostrategic logic with thin economic reasoning. Long-term revenue projections in those projects are not adequately risk-weighted; assumptions rest on wishful thinking, ignoring red market flags. Cost control and project governance standards are hollowed out by pervasive corruption and geopolitical dependencies.

BEH’s sick man – TPP Maritza-Iztok -2’s financial records reveal persistent losses over the last four years and a gloomy forecast over the staggering cost for emission permits.

With revenues from electricity sales by TPP Maritza Iztok -2, oscillating around BGN 700 million per year, and rising costs of emission permits, at 22 euro/ton reaching BGN 300 million per year, the current shock price at 40 euro/ton for permits will shoot the bill above 550 million leva in 2021.

Under the present scenario, the loss estimate will pass the 500 million leva mark, effectively wiping off the balance sheet all asset book value of one and a half billion leva by the end of the year. Action is not only overdue; it is impossible to fix the damage or bring it to acceptable levels.

A similar fate awaits the equity capital in the ‘American’ Maritza East 1 and 3 TPPs when and if NEK terminates the long-term PPAs by June 30th, 2021, as envisaged in the Reform Implementation plan submitted to the EC.

Both Contour Global and AES will have a legally justified excuse to terminate contracts for operating both TPPs and resort to arbitration courts, with a potential claim above 2 billion leva for direct damages.

The market value of both TPPs will take a deep dive with the legal uncertainties and the lack of investment in securing a decarbonized future for both TPPs. The destructive effect to the national power system’s balancing potential, deprived of its primary balancing workhorse, is impossible to fathom.

The potential loss in the equity capital of at least 5 billion leva in TPP ME 1, 2 and 3 will effectively kill Bulgaria’s coal-based power generation, denying it a decarbonized future and modernization investments.

The damage to the energy system is incalculable. If the two US companies walk out after the PPA unilateral termination by NEK – no wonder if we end up with Dogan and Kovachki operating MW1 and ME3 – more of Borissov’s classic ‘kick out foreign investors”stratеgy to expand oligarchic control.

Most government actions amount to pre-electioneering with no specific plan, timescale, resource allocation and due project development process.

Next on the radar of asset destruction is the “pride” of Prime Minister Borissov – Bulgartransgaz, which implements the largest infrastructure project in history – the continuation of Turk Stream – the Balkan Stream. Despite continued success claims, a closer look into the financial statements reveals a far more complicated and obscure picture – sharply increased debt levels and alarming debt-to-equity ratio. The speed of accrual of liabilities and poor project cost control with the final project cost uncertain is exemplified in the striking gap between the construction cost per km in the IGB (1,3 million euro per km) and the Balkan Stream (2,97 million euro/km).

These articles analyses and comments are made possible thanks to your empathy and contributions, which are the only guarantors of independence and objectivity in our work. The Alternatives and Analysis team.




The IGB project passes through the Rhodopes, crosses the Maritza river and a major dam.

In Balkan Stream, which traverses a far less challenging terrain of the Danube plain, the price per km is 2,3 time higher. Though there is a difference in the pipe cost and the compressor stations – the size of the “corruption” cushion and managerial deficits in cost control are easily detectable.

The accumulation of new debt of nearly 1.4 billion euro on BTG’s balance sheet, following Balkan Stream’s construction, with the uncertainty of the regulatory and political risks, takes a toll on the revenue projections and financial status. This reasoning line – a high and potentially unmitigable political risk with Nord and Turk Stream, is reflected in the recent Gazprom’s prospectus on a new bond issue, telling the story of an unprecedented scale of the “value at risk” (VAR) exposure in Bulgartransgaz. If in 2014 with equity capital above BGN 2 billion, the liabilities topped BGN 170 million, ie below 9 percent, at present they represent about 60 percent of the equity. An even more shocking picture is the debt-to-income ratio before and after the Balkan Stream. Before the start of Balkan Stream BTG’s annual income exceeded the level of liabilities by almost 1.7 times, today the company’s debt surpass the most optimistic version of revenues 6 times!?.

The amount of debt related to “non-guaranteed” or exposed to unpredictable political risk revenues tells the story of precarious short term liquidity and debt/ equity ratios problems. BTG’s financial status before the start of Balkan Stream was far more solid.

The new interconnector to Serbia stems from the need to justify Gazprom’s monopoly on Turk-Balkan Stream, and the associated new 140m-euro loan will further burden Bulgartransgaz balance sheet.

The story of the state gas trader Bulgargaz is not great either.

Despite its price competitiveness, the long-awaited Azeri gas has little to no effect on the national gas market due to much lower intake than contracted. Bulgargaz has controlled 80-81 per cent of the market in the last two years, and the percentage has shot up at the beginning of 2021 above 93% but the future holds certain losses of market shares at the expense of new competitors. The government trader practically does not develop new projects to expand its customer base and sales in the region.

Loss of market shares is preordained by the rigid ‘take or pay’ clauses and price formulas in long-term contracts with Gazexport and the Azerbaijani Gas Supply Company, further undermining the company’s capitalization.

In two of the last seven years, Bulgargaz has declared a loss, with sales invariably revolving around a bar of the “take or pay” – 2.5 billion cubic meters. The company jealously guards data on the quantities and the terms of purchased Azeri natural gas. Still, we calculated a national gas balance from the physical flows entering and exiting the national and the transit transmission system to determine the residual potential for “new” Azeri gas that Bulgargaz could sell on the domestic gas market. Physical gas flows enter Bulgaria from Turkey and Romania, and Azeri gas, Bulgargaz alleges, enters via a backhaul capacity arrangement between DESFA and BTG. After deducting the ToP volumes for Russian gas and UGS Chiren withdrawals from the gas balance between the quantities that enter and leave Bulgaria, the potential niche for Azeri gas remains in the range of 0.83 mcm/day, the daily average for committed takeup of 225 mcm until the end of September, below Bugargaz’s booked capacity of 14 000 MWh/1,3 mcm/d at Nea Messemvria.

These estimates can hardly warrant the fanfare of accomplished diversification claims. Suppose AGSC is not seeking compensation for gas contracted but not taken, thereby denying itself sales proceeds. In that case, Bulgargaz should have negotiated an interim solution for the ‘excess’ Azeri gas to end up somewhere else” and avoid penalties?

We could speculate that Turkey, Greece or Italy are the natural destinations, with “intermediaries” close to the Government, reaping the benefits and Bulgargaz playing an active role.

Last year changes to the Statute of BEH removing advance clearance by its Board of sales and purchases of natural gas by Bulgargaz contribute to the secrecy. The state trader’s management has no obligation to trade transparently through the gas stock exchange. Bulgargaz’s transactions are, at present, less transparent and more prone to arbitrary decisions by the management than before.

It is no coincidence that when, in rare instances, Bulgargaz reports profits, they reflect circumstances beyond their control and more of a creative accounting than tangible results. BEH buys off debts from its subsidiaries – NEK, Bulgargaz, and Sofia District Company, shielding losses.

The 77 million euro fine from the EC DG Competition would further dent the balance sheets of BEH, BTG and Bulgargaz, and the taxpayers will foot the bill for criminal mismanagement.

Management efficiency and successive GERB governemnts’ legacy should be measured by the difference in market capitalization of the state-owned energy companies before GERB comes to power and when they leave.

Bulgargaz’s losses could hit hundreds of millions of levs, and the worst is yet to come with the inevitable drop in market shares.

For its part, the National Electric Company – NEK is also is in ICU unit. Creative accounting and the fact that the NPP Belene debt of BGN 3.5 billion (with added interest) has not been written off as sunken costs, allowing after 14 years delay to treat it as a “project in progress”, keep NEK afloat and not bankrupt. Suppose NPP Belene’s non-performing assets are added as a liability to the BGN 1.2 billion in accumulated losses since 2014. In that case, the sum in the red will equal the current book value of NEK’s total assets. Henceforth, during GERB’s rule, NEK’s equity of almost BGN 5 billion has vanished.

In the interim, NEK proceeds from sales of electricity have plunged by 25 per cent over the last 4 years, amplifying the company’s dire strait.

The situation is identical in the Maritza East Mines. Despite the non-market high price of coal and the purchase obligations under the contracts with the “American” TPPs, the mines face existential threat given the Government’s plans to exit the long-term power purchase agreements with TPPs Maritza East” 1 and 3. Consequently, mines will not sell coal, and hundreds of millions of leva of its equity will disappear from Mini Maritsa Iztok’s books.

The cumulative financial effect in equity loss during GERB’s governments and management in the energy sector, measured in the loss of asset, revenues and competitiveness, exceeds BGN 10 billion with a gloomy forecast.

To add insult to injury, the people who brought Bulgaria’s energy sector to its knees plan to remain in charge for at least the next three years, which guarantees that the catastrophe will be in full swing.

Ilian Vassilev

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