Denitsa Mukova in Sofia -

After months of negotiations, Montenegro’s government and A2A have agreed to extend the Italian company’s management contract for power monopoly Elektroprivreda Crne Gore (EPCG) for another five years, Economy Minister Vladimir Kavaric told a news conference in Podgorica on October 15.

The two main owners of Podgorica-listed EPCG have been negotiating since April on a possible extension of A2A’s management contract, which expires on October 15. The contract has been temporarily extended three times as the two parties were not able to reach an agreement. According to local media, the government has said several times that it is ready to continue without A2A if the Italian company does not agree on the joint construction of a new thermal plant unit. On the other hand, according to unofficial reports, A2A wanted to exit EPCG and sell its stake back to the government.

The new five-year contract will enter into force when the two parties sign a shareholders agreement, which is planned to be completed by the end of the year.

“A2A and the government of Montenegro have agreed a term sheet with agreement on several fundamental principles that will serve as the basis for the drafting in the next two months of new, long-term agreements for the operation of the Montenegrin energy company, EPCG,” A2A said in a statement. “In order to allow for the implementation of the next steps, a decision was made to extend the agreements in effect since 2009 until 15 December 2015.”

The contract between A2A and the government was signed back in 2009 after the Italian company acquired 43.7% of EPCG in a major privatisation deal. The Italian company then paid €435mn. Since then, electricity prices have been reduced, resulting in A2A failing to meet its investment targets.

The construction of the second unit at the TE Pljevlja thermal power plant was the main issue in the talks between Montenegro’s government and A2A over the management of EPCG. The project aims to extend the capacity of TE Pljevlja, which now has only one unit of 210MW. The new unit would have a capacity of 220-300MW and net electricity efficiency of no less than 38%. The project also envisages providing heating for the town of Pljevlja in cooperation with the local administration.

According to Kavaric, the two parties have now agreed on a schedule for the construction of the second unit. Earlier in October, Kavaric said that a new company must be set up for construction of the unit, with the state and EPCG holding the majority share, and A2A a stake of between 15% and 20%.

The new shareholders agreement will also include a put option and a business plan for EPCG, which will be prepared by A2A and monitored closely by the government. According to the put option, A2A will receive €250mn from the government in seven annual installments if the Italian partner chooses to exit EPCG. However, the put option can be activated only following negative effects from external markets, adverse weather conditions or significant changes to Montenegro's tax regime. If the business plan is not implemented, the exit strategy will not be valid.