Tim Gosling in Prague -
CEZ announced on July 23 that five of its coal-fired power plants are now up for grabs in an attempt to satisfy the European Commission competition regulators, and it has hired the local unit of Deloitte as its financial adviser on the sale.
The Czech utility revealed it has already held talks with Czech energy group Energeticky a Prumyslovy Holding (EPH) and Czech Coal as potential buyers, but analysts suggest the list of realistic suitors may be extremely short for plants that should essentially be in a museum, and for several reasons the Commission, which is investigating CEZ for abusing its dominant market position, is likely to attach other conditions when it finishes its probe later this year.
"CEZ offers the following of its coal power plants for sale: Pocerady, Chvaletice, Tisova together with Melnik 3 and Detmarovice," the company said in a statement. "This step is consistent with its long-term corporate strategy to operate just a limited number of upgraded coal power stations in the future; at the same time, the divestments will enable CEZ to put a quick end to the investigation conducted by the European Commission since 2009."
Although CEZ, 70% state-owned, claims the move is motivated by the bid to mollify Brussels, as well as the pressing needs of its nuclear expansion programme, it's the age and lack of viability of the plants that are the most compelling reason behind the sales, particularly in light of growing disputes with coal suppliers over contract prices that Jan Ondrich, an analyst at the Prague advisory firm Candole Partners calls "ridiculously low."
Indeed, the company has been trying to offload these assets for some time, but has struggled to whip up interest. Ondrich says he only sees the 1,000-megawatt (MW) Pocerady plant, one of its most profitable, as attractive, noting the 800-MW Chvaletice and Detmarovice are particularly problematic. "CEZ will try to bundle them together in some format to package the bad with the good," Ondrich suggests, adding that the effect of the EU investigation has been to speed up the divestment.
The company first formally suggested that it might sell Pocerady and Chvaletice in May, claiming commercial motivations. Earlier this month, it officially submitted the plan as a proposal to the EU in a bid to close the competition office investigation into abuse of its market position. CEZ failed in an earlier attempt to persuade the EU that it should be regarded as a regional utility, which would hugely reduce its rated market share. Although Brussels says it is currently studying the proposal, the power giant appears confident that these asset sales will be accepted by the regulators. "As part of the settlement, CEZ committed to selling one of the aforementioned power stations," it said.
CEZ's share of the Czech market is due to spike later this decade if the utility completes its plan to more than double capacity at the Temelin nuclear power plant. At the same time, that nuclear programme is pushing the need for investment capital - Temelin alone is likely to cost up to €10bn - and CEZ is already scouting for potential partners to help it fund the expansion. "The capital freed in this manner will be available for investments in the company's new strategic priorities, such as nuclear energy and renewable source development," CEZ said, adding that the company expects more profit from divesting the plants than if it continued to operate them, but did not give any financial details.
However, given their low output and profitability, the plants will struggle to meaningfully contribute to CEZ's finances, and Brussels will likely demand some additional conditions, analysts say. Reports says CEZ expects the sale of the assets to raise CZK20bn-40bn (€0.781bn-1.56bn); others suggest it will be lucky to get half that, because the list of potential suitors is so short.
Old and inefficient power stations with a monopoly fuel supplier rarely attract many investors - the only realistic bidders are those fuel suppliers themselves. That puts Czech Coal in prime position for Pocerady and Chvaletice, while Sokolovska Uhelna - also in dispute with CEZ over prices - is reportedly interested in Tisova.
The other name consistently linked to the possible sales is EPH, owned by closely-held financial groups PPF Group and J&T Group. EPH has shown big ambitions to build a Central European energy empire over the past few years - many accuse it of working with CEZ to carve up the Czech market between them - the European Commission is unlikely to allow it to compete. "The commission's proposed contract with CEZ will essentially give it control of the sales process," Ondrich says. "It stipulates that the buyer must be unrelated, at no risk of collusion with CEZ, and able to prove fuel supplies. None of that works in EPH's case."
With few financial investors likely to bid for "plants that should be in a museum," Ondrich says, that should give the coal mining companies the power to dictate terms.
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