IPOs and strategic investments laying basis for power sector's modernization
Poland's energy sector is riding a wave of initial public offerings (IPO) and sell-offs to strategic investors that will continue through 2000, although some of the biggest deals have already occurred in the first month of the year.
Among IPOs, the golden apple is Belchatow, in central Poland. The country's largest power plant, it produces 20% of national electricity output. Belchatow hopes to generate $150 million-$200 million from the issue, due in the first quarter of 2001. Heat distributor MPEC Wroclaw is aiming for a March launch on the Warsaw Stock Exchange (WSE). So far, the only power firm listed on the WSE has been the small Bedzin plant, in greater Katowice, which has attracted little interest since its November 1998 debut.
But strategic investment has provided the recent news. Foreign investors Elcho and Foster Wheeler jointly signed a $320 million contract last week to refurbish and eventually own a power plant in Chorzow, a city in greater Katowice. The United States' PSEG Global owns 80% of Elcho. Two weeks ago Sweden's Vattenfall bought 55% of Warsaw's Elektrocieplownie Warszawskie for $230 million. Vattenfall will invest $600 million in the company over the next decade. Elektrocieplownie Warszawskie produces 24% of Poland's hot water for heating, and 3% of electricity, according to Citibank (Poland).
"Strategic investors are interested" in the sector, said Anatoli Kaminov, an analyst at investment bank Merrill Lynch. This is because while Poland has "very old assets in (power) generation and they're very inefficient ... it's a big country" with a lot of potential. "Investors hope to position themselves in the market for the future," he said.
Key to strategic investor interest is the expectation of acquiring various generators, distributors and combined heat and power plants from the very fragmented power industry. "If they can buy bits and pieces of different companies and merge (them) later, they can benefit from economies of scale," Kaminov said. Poland has 34 major power plants, 350 smaller ones and an electricity transmission monopoly, Polskie Sieci Elektroenergetyczne (PSE), which gets power to 33 local distributors.
Investors from Germany and other countries bordering Poland have added incentive: the lure of exporting Polish electricity to their home markets, said Dariusz Turek, an associate in law firm Cameron McKenna's energy and projects department. "(Polish energy) can be fairly competitively priced. It's such an obvious area for expansion," he said.
Shortly before January's burst of activity, Electricite de France subsidiary Finelex took 57.9% of Elektrocieplownia Krakow. A consortium led by Elektrim agreed to put up $87.9 million for 20% of Patnow Adamow Konin, (PAK), a large power plant between Warsaw and Poznan. The consortium will invest a further $100 million by April, raising its stake to 38.5%, and a further $1 billion over the next decade. The country's second-largest power plant, PAK generates 9.8% of Poland's electrical output.
Several other moves should happen by this summer. Belgium-based Tractebel will negotiate for 30-50% of energy generator Polaniec, whose value Citibank (Poland) assesses at zl. 1.55 billion ($369 million). This month the Treasury Ministry expects to choose an investor for 30-50% of the Rybnik power generator, which has a zl. 655.1 million ($159.8 million) book value. The short list includes National Power, EnBW Baden Wurtenberg, and a consortium of Marubeni, NRG Generating Corporation and General Electric Corporation. Polaniec and Rybnik are the fifth and sixth-largest electrical plants, with 6.4% and 5.8% of Poland's capacity respectively. Next week the ministry hopes to select an investor for 52.5% of Bedzin, a zl. 62.7 million ($14.9 million) book value.
This activity has occurred amid the liberalization of Europe's energy markets begun in Britain a decade ago, but accelerated recently, said Pawel Zach, senior research analyst at Citibank. Industry watchers said that modernization of Poland's plants which jointly create much of the region's air and water pollution must precede European Union (EU) accession.
"Poland must liberalize the (power) market and adopt European rules before entering the EU," Zach said. But "plants need to be modernized to meet the standards," he added. Zach estimated modernization costs at around $20 billion before 2010 one-fifth of the $100 billion foreign direct investment that economists say Poland needs in the next decade.
