Treasury decision a threat to the Bełchatów privatization deadline

KWB is one of the few profitable coal mines in the country.
By : Leo Broomfield

   The Treasury Ministry’s approval to build the Elektrownia Bełchatów II power generator could hamper the sale of heavyweight coal-fired power plant and producer Elektrownia Bełchatów, set for the final quarter of 2002, analysts said.

   Industry watchers said increased investment costs in the new plant would not guarantee growth in sales revenues.

   “The company’s search for distribution partners in the pre-sale period may also complicate the process,” said an analyst who wished to remain anonymous. He said investors would be wary of buying into a multi-unit holding in which they would have to conduct separate privatization analyses and due diligence on each company.

   “Add to that an obligation in the existing power sector privatization strategy to sell the generator with its adjacent coal mine, opposition to the sale, particularly from the mine’s trade unions, and not a great deal of enthusiasm on the part of some within the company’s management, and the recipe is one for delay,” he said. The new government’s uncertain energy sector privatization plans are also a key concern.

   In the business plan drawn up by the Bank of America, the cost of the Bełchatów II project is estimated at $750 million. Tadeusz Banasiak, the bank’s president, said the search for a contractor will start by the end of the year. Construction is planned to start in the final quarter of 2002, and power will be produced no earlier than 2007.

   Gathering credit

   Some 20-30% of the total construction costs will be covered by Elektrownia Bełchatów from its own coffers, with the rest borrowed from commercial creditors. This changes Elektrownia Bełchatów’s pre-privatization investment profile, and raises questions about potential investors’ obligations in the plant. The company’s privatization adviser, Sears First Boston, would not comment.

   “We do not want to have any undue impact on the chances of its success,” said Michel Szwarc, Sears First Boston’s specialist adviser on the sale.

   Elektrownia Bełchatów II will have 833 megawatts of power generating capacity, adding to Elektrownia Bełchatów’s existing 4,320 megawatts (it has 12, 360-megawatt blocks). It will be fired by brown coal from the adjacent open-pit mine, Kopalnia Węgla Brunatego (KWB). Elektrownia Bełchatów already supplies about 20% of all power in Poland’s national grid, and is estimated to be worth about $4 billion. KWB produces about 58% of all brown coal used in Poland and is one of the few profitable coal mines in the country.

   Meanwhile, the treasury also last week accepted preliminary proposals to consolidate Elektrownia Bełchatów with six power distributors, creating the new Polska Grupa Energetyczna (PGE). The six distributors that currently make up Western Group (Grupa Zachodnia) are Energetyka Poznańska, ZE Gorzów, Bydgoszcz, Szczecin and ŁódŸ-Teren and Łódzki Zakład Energetyczny. All the firms signed a letter of intent on July 30. Elektrownia Bełchatów was earlier linked with three other distributors, ŁódŸ Miasto, ŁódŸ Teren and Zakład Energetyczny Częstochowa. Analysts said a capital merger of Elektrownia Bełchatów with the six plants would be the best way to guarantee its planned investment in Elektrownia Bełchatów II, avoiding the problem of looking for new power purchasers.

   Finding buyers

   A key challenge facing the new plant will be finding buyers for its power. “We are talking mainly with distribution companies and haven’t ruled out signing a deal with Polskie Sieci Elektroenergetyczne (PSE), the grid operator,” Banasiak said.

   “To close the financial side of this deal and guarantee a return for the company, we must sign a contract for a minimum of 15-20 years.”

   Elektrownia Bełchatów officials played down the role of Elektrownia Bełchatów II in the privatization of the power plant. “We are not connecting the building of Bełchatów II directly to the privatization of Bełchatów as whole,” said Dariusz Doman, the company’s privatization director. “Construction will be realized in the form of ‘project finance,’ and will not be dependent on Bełchatów, although it will be 100% owned by Bełchatów.”

   “The chosen investor for Bełchatów, or, if the consolidation is a success, of the whole group, will not have to buy Bełchatów II,” Doman said. Asked, however, if the investor would be obliged to invest in Elektrownia Bełchatów II, he said that it will depend on the privatization agreement.

   “At the moment, we are working on consolidating with six distributors by bringing all the companies’ assets into one holding, a mother company,” he said.

   Analysts said the new plant is essential for Elektrownia Bełchatów to control rising production costs. These costs, they said, could be held down if Elektrownia Bełchatów II is built, as the new plant is expected to offer cheaper power, offsetting rising costs with of Elektrownia Bełchatów’s production.

   Opening the market

   Marian Miłek, outgoing deputy treasury minister responsible for power sector sales, said earlier this year the sale of Elektrownia Bełchatów depended on how fast the electricity market would open, whether long-term contracts were fulfilled and deadlines kept, and restructuring the company’s debt. Bełchatów has already pulled out of the first phase of dissolving the long-term contracts within the so-called System Opłat Kompensacyjnych “SOK” compensation system, and power sector liberalization still looks some way off.

   On the up side, the Environment Ministry took Elektrownia Bełchatów off the list of Polish firms most damaging to the environment in December 2000. The company had been on the list since 1990, due to its above average sulfur (SO2) emissions.

   Doman said relations with the trade unions are good. “They have got used to the fact that the sale will go ahead,” he said. But KWB is dominated by more active, rebellious union, Sierpień ‘80. “We have not ruled out that the unions will oppose the sale. They could use their veto,” Doman said. That will mean further negotiations on a post-privatization social package with employees and will further add to the chosen investor’s costs.

   Elektrownia Bełchatów President Edward Najgebauer said earlier that the plant does not need privatization to raise capital, to gain know-how, or to increase its market value. “Privatization is only necessary to fill a hole in the state’s budget,” he said.