Polish govt insists market turmoil won't delay IPOs of energy companies

By bne IntelliNews February 11, 2008

Nicholas Watson in Prague -

News that the current turmoil in the world's financial markets won't interfere with the Polish government's plans to privatise four giant energy companies is welcome news. Without a massive, quick injection of investment into its aging electricity sector, analysts warn that the country could be facing power shortages.

Deputy Treasury Minister Jan Bury said in an interview with the daily Parkiet published Monday, February 11 that the government is not considering changing its timetable for the privatisation of the power sector, which will see IPOs of the four large, vertically integrated holdings that lump together power plants with coal mines and other energy infrastructure. These four companies were part of a consolidation plan first formulated by the Democratic Left Alliance government in 2005 and implemented by the previous conservative government.

The largest of the four groups is Polska Grupa Energetyczna (PGE), the size of which will be roughly comparable to the Czech Republic's CEZ. It will control 35% of the country's generation capacity and about 25% of the supply business. The others are Tauron Polska Energia, Enea and Energa.

Bury told the newspaper that Enea is likely to hold its IPO on the Warsaw Stock Exchange either in May or June, with the Treasury selling up to 25% of the energy firm. A lower stake in PGE will be offered in November or December this year. "The size of IPOs will depend on the companies' investment needs," Bury was quoted as saying. "The capital raised from the stock market must be spent on rebuilding capacity, restructuring and expansion."

The other two energy holdings, Tauron and Energa, will debut on the WSE next year. Bury estimates the state will sell at least some 25-30% of its energy assets within the next four years.

Raising money

The thinking behind the creation of these four energy groups is that they will have a greater ability to raise the huge amounts of money needed to expand and modernise the country's electricity sector. "The government understands that the country needs to invest in new power generation capacity and modernise its distribution networks so this is one of steps to enable that approach to make the necessary investments over the next 5-10 years because larger vertically integrated groups will have more access to capital," says Arkadiusz Wicik, associate director of energy and utilities at Fitch Ratings in Warsaw.

According to Katarzyna Rozenfeld, energy director at PricewaterhouseCoopers in Warsaw, by 2010 an extra 1.8 gigawatts (GW) of generation capacity will have come online, but industry projections show that from 2007 to 2030 the country will require at least 1 GW of additional capacity per year. This problem is compounded by the fact that a vast amount, more than 40%, of installed capacity is more than 30 years old so will have to be replaced. "The problem is not only to meet increasing demand, which is forecast is likely to double by 2030, but on other hand we also need to replace the capacity that will disappear because it's either obsolete or does not meet environmental standards," says Rozenfeld.

Given that every 1 MW of additional capacity requires €1.2m-1.3m of investment, the amounts required will be massive. And Piotr Olejniczak of KPMG Advisory in Warsaw warns that these costs will be inflamed by the increasing project finance costs of large energy projects. "Our recent contacts with major engineering firms indicate that Poland's projects must compete with those not just in European but in global terms, and the indications are that the capacity of the industrials to provide the machinery and equipment for major energy projects is pretty stretched at the moment, which will translate into higher prices and, correspondingly, capex requirements," Olejniczak says.

But will these groups be able to meet the investment requirements, especially with the abolition from April of the sector's long-term power purchase agreements with industrials, which were used by power firms as collateral for loans?

The end of the first stage of the power sector's reform process will be the floatation of the stakes of these groups on the WSE this year and next. However, after that the government must decide on the politically thornier issue of whether to sell further stakes in these power groups to foreign strategic investors. "This is the moment when various forces in the government need to reach a consensus, because Civic Platform is leaning toward privatisations and the gradual introduction of foreign investors whereas the Peasants' Party wants them to remain under state control," says Olejniczak.

The elections last year were won by the Civic Platform party, which formed a coalition with the Peasants' Party.

Unsurprisingly, realists like PwC's Rozenfeld argue that foreign strategic investors will bring the know-how and experience, money and ability to raise even more money. However, she notes that, "I can hardly imagine any strategic investor being interested in a minority package."

In the meantime, though no one doubts that there is little time left for dithering to start making the necessary investments, the big question is whether the government has left it too late. While Fitch's Wicik reckons there is reasonable capacity margins to prevent power outages (barring an extreme winter) if significant investments in new generation capacity are made over the next 5-10 years, Rozenfeld worries there simply isn't enough time to prevent them. "As a person involved in this sector for many years, keeping the lights on is my biggest concern. Bearing in mind the predictions for the size of the investment and projections for the increase in demand, this could be the largest challenge for the new government," she says.

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Polish govt insists market turmoil won't delay IPOs of energy companies

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