French company keeps Baltics warm

RIGA - The cold climate and socialist-era heating networks are drawing French heating system operator Dalkia into cities and towns across the Baltics as the company looks to new, growing markets.

With local subsidiaries in Latvia, Lithuania and Estonia, Dalkia is eyeing the region because of its potential for rapid growth and its heavy dependence on municipal heating systems, said Andreas Greim, Dalkia's director for the Baltic countries.

"The Baltic countries are of interest because they are cold countries," he added. "The colder they are the better."

Winter temperatures in the Baltics can reach minus 30 degrees Celsius.

With few opportunities for growth in mature markets, heating companies like Dalkia can either diversify into related fields or expand geographically, commented Arvids Kostomarovs, a manager at PricewaterhouseCoopers' Riga office.

Dalkia is not alone in choosing the latter option. "This is a common approach for heating utility operators," he said. "There are a number of companies screening the market for opportunities."

Others eyeing the Baltic heating market include Swedish firm Sydkraft AB and Dutch International Waterdevelopment BV.

Both firms recently lost out to Dalkia, one of Europe's largest heating system operators, in the tender for a 15-year lease on Vilniaus Silumos Tinklai, the Lithuanian capital's heating company.

According to Vilnius Mayor Arturas Zuokas, Dalkia's offer not only met the city's four main criteria regarding consumer prices, the size of investment, company resources and the number of lease payments, it was also the most clear cut.

While the city and Dalkia still have three months of bargaining ahead before the transaction is complete, the French firm has promised a 430 million litas ($107.5 million) investment and a 5 percent drop in heating prices for domestic consumers. Businesses would get a 7 percent to 8 percent price drop.

Even with investments and price cuts, heating utility management companies still stand to make a profit because their extensive experience enables them to run a company far more efficiently, Kostomarovs said.

The city chose to lease rather than sell Vilniaus Silumos Tinklai because it wanted to keep the property in municipal hands.

"Heating companies are monopoly companies. It is best for the city to keep ownership," Zuokas said. "If the city council wants to sell, it can in 15 years."

Dalkia has also clinched victory in a tender for a 44 percent stake in Daugavpils Siltumtikli, the city-owned heating utility in the eastern Latvian city of Daugavpils. Unlike Vilnius, Daugavpils decided on a standard privatization scheme - investment for shares in the company.

The first installment in Dalkia's initial foray into the Latvian heating market is set at 1.5 million lats ($2.42 million) - 25 percent of the total price.

Baltic benefits

Dalkia, which has already experienced 10 years of expansion through privatization in Hungary, Slovakia and the Czech Republic, is especially keen on the Baltic states because such a large proportion of consumer and industrial users are connected to city heating networks.

Unlike Western European countries where a low percentage of consumers are hooked up to distribution networks - 5 percent in France, 10 percent in Germany and 25 percent to 40 percent in Scandinavia - over 60 percent of people in the Baltics are connected.

For now, the number of customers on municipal heating networks is staying fairly steady. In Riga, there has only been a 1 percent drop in network users over the past few years, while numbers have remained stable in both Tallinn and Vilnius.

"Some people are leaving and some are becoming customers," said Malle Aleksius, a member of the management board at Tallinna Soojus, Tallinn's heating utility. "Gas is still popular, although it was more popular three to five years ago. And now we have new management."

Much of what makes Latvia, Lithuania and Estonia attractive to foreign heat distribution companies dates back to the Soviet regime.

The Soviet Union saw heating as a public utility and did their best to connect all people and businesses to one universal system, Greim said, hence the high percentage of people still using municipal heat.

Unfortunately, the same communist influence means the heating networks have lacked adequate investment and experienced management.

And Dalkia hopes to enter the market through these gaps.

Either buying into a local heating utility or leasing it from the municipality, Dalkia brings in experienced management and invests money in the decaying heat delivery systems, Greim said.

"They need investment and management," he added. "We have 60 years history and experience."

Most of all, it is a relatively safe financial bet for the French firm.

The economy in all three countries is stable, the market already exists and there appears to be room for growth.

Most of all, there is lots of cold weather.