Банкеръ Weekly

Briefs

CEZ STARTS CONQUERING THE BALKANS FROM SOFIA

Welcome to the winning team, Georgi Mikov, Executive Director of the Capital Electricity Distribution Company, greeted the managers of CEZ (the future owner of the company) on September 27. The agreement between the Czech investor and the Privatisation Agency (PA) for sale of the energy companies included in the Western Bulgaria pool (electricity distribution companies in Sofia, Sofia-region, and Pleven), was signed on September 14. The price of 67% of the shares was fixed at EUR281.5MN. The official reason for last week's visit of CEZ managers was to show them how the three companies have been managed in the past four years.Whether this team will become champion is yet to be seen.The prerequisites are more than promising at presentThe Czech managers won the most attractive pool that united 1.8 million subscribers and reported a BGN52.76MN profit last year. The Electricity Distribution Company - Sofia in particular showed the best financial results of all the seven companies (it reported a profit worth BGN31MN).Obviously, CEZ attaches great importance to its presence in Bulgaria which can be guessed seeing the members of the delegation to Sofia. It included the Czech Minister of Industry and Trade Milan Urban, his deputies Martin Tlapa and Martin Pecina, the Chairman and General Manager of the Czech company Martin Roman, and the head of the Mergers Acquisitions Department Vladimir Schmalz.CEZ's involvement in the Bulgarian energy sector is very important and symbolic for the relations between the two countries. It will be a sign for other Czech investors to step on the Bulgarian territory, Minister Urban underlined. The company director Martin Roman added he hoped Bulgaria will become our second mainstay - as stable as the one in the Czech Republic. The reasons for that confidence are not limited to the company's experience. For the first quarter of the current year CEZ's net profit reached EUR160MN which is 57.4% higher compared to the same period of 2003. Its operating revenues have grown considerably, too - they are up by 74.7% reaching EUR843MN. All those results are mostly attained due to the expansion of the company and the growth of its sales not just in the Czech Republic but also on the Central European market.CEZ is now faced by a new challenge, this time as an investor who is about to take up a lot of work in the three Bulgarian companies. The plans are to make them meet the European standards relatively quickly (before 2007).The priority task will be to reduce lossesof electricity in the companies where the average value of the waste exceeds 20 per cent. We know about this problem and we are going to point our efforts towards reducing waste along the network as it is three times the losses we have at home, CEZ Executive Director Martin Roman told the BANKER weekly. He refused to say concrete figures concerning the investment program and the modernisation of the three companies and promised to do it when the Council of Ministers approves the deal. Let's sign the final agreements first and get the shares in the electricity distribution companies and then make the comments. It is certain that we shall count on efficiency and productivity, Mr. Roman said. The implementation of this task also suggests optimisation of the number of personnel and emergence of another problem. The Czech businessmen already declared that they wanted to merge the three companies which would inevitably cause dismissal of personnel. That will probably provoke protests from the trade-unions. In Sofia CEZ's director said nothing about this detail. Now it is only certain that after the sale is concluded, a joint company will be established that will include part of the current management of the distribution companies. We think that local business should be run by local people, Martin Roman said.The ambitions of the Czechs do not end with stepping on the Bulgarian market but also include conquering stable positions thereA special study of the authoritative Economist magazine ordered by CEZ shows that Bulgaria, along with Croatia, is among the states with the lowest level of investment risk on the Balkans. Meanwhile, the country has the highest consumption of electricity in Southeastern Europe and the growth of its energy market exceeds the growth of more developed markets. Its western electricity distribution region attracts particular interest and there are reasons for that. There is the biggest number of solvent customers there, while the networks are short and loaded (i.e. a good management would make the technological losses the lowest ones). It is also important that there are free production powers available and the united distribution company will be able to buy electricity directly from them (like the Kozlodoui nuclear power plant, for example). Moreover, it will do it at much lower prices than those regulated by the state. And that will guarantee an additional profit to the future owner.However, CEZ's aim is to close both the trade and the production cycle laterthrough acquiring electricity producing powerWe're going to participate in a tender organized by your country for privatisation of the thermoelectric power plants in Bobov Dol and Varna and the heat-and-power supply company in Rousse, Martin Roman confirmed in Sofia. According to Bulgarian experts, the Czech businessmen are particularly interested in the plant in Bobov Dol, since it is part of the Western Bulgaria pool. But the experts also say that each candidate to acquire it will have to reach a preliminary agreement with the Russian Gazprom company as well. Otherwise, the investment is not worth it. Now the three 210-megawatt turbines of the plant operate with local coals which are lite, have high ash content, and are obtained by old equipment hundreds of meters within the ground. That is why miners in the Bobov Dol basin are among the best paid in the sector which makes the used coals even more expensive. Considerable investments will also be needed for reduction of the sulphur and hothouse emissions and restriction of the dust pollution.The high price of the resource and the necessary ecological investments cannot be compensated even by the fact that electricity produced by the plant in Bobov Dol is among the most expensive in Bulgaria (nearly BGN0.10 per kilowatt-hour). The only way to make the plant efficient is to introduce a combined production cycle Then the turbines will operate with both coals and natural gas. The transit principal gas pipe to Greece passes near Bobov Dol. But the pipe is currently used by Gazprom which pays an annual fee for the full capacity of the equipment regardless of the transported amounts. Therefore, it is Gazprom that should permit the over 2 billion cubic metres of natural gas needed for the plant per annum. The price at which the ecological material would be bought depends on the Russian monopolist, too. The highest current values of the oil products will probably not change in the future, so they make the production of electricity from natural gas inefficient. But if the owner of the plant comes to an agreement with Gazprom (or participates in the competition with the company), the situation will change significantly. The blue fuel will reach the plant in Bobov Dol at prices lower than the average for the country, will make the production of electricity profitable and justify the initial investment for the acquisition.As to the other two coal plants for sale (in Rousse and Varna), the situation is slightly different. Acquiring them, their future owners will insure themselves safe presence on the electric energy market on the Balkans where deficit will continue for 20 more years at least.Moreover, we should not forget that the single European energy market will be established in 2007. Then the electricity distribution companies in Western Bulgaria will become part of a large Balkan electricity distribution system that will connect the networks in Bulgaria, Turkey, Greece, Romania, Macedonia, Serbia, and Croatia, through intersystem links to Southern and Central Europe. That is why all the big western companies are interested in this region. We want to be partners with the big western energy players, said the CEZ director Martin Roman during his visit in Sofia.

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