PRAGUE/FRANKFURT Two Czech firms have submitted bids for Vattenfall's loss-making lignite coal mines and associated power plants in Germany, but to reach a deal the Swedish state-owned group might have to pay into covering future decommissioning costs.
The sale, launched at the end of 2014, includes roughly 8,100 megawatts (MW) of lignite-fired power plants, which generate about 10 percent of Germany's total electricity, as well as the mines, employing about 8,000 people. Lignite miner Vrsanska Uhelna, part of Czech Coal, and privately-held energy group EPH together with private equity group PPF Investments, have both submitted binding offers, the firms said on Wednesday. German energy group Steag and Australian investment fund Macquarie did not make a formal bid but to stay in the negotiations suggested setting up a foundation that would take over the lignite assets and liabilities, a source familiar with the proposal said.
Vrsanska Uhelna did not provide any details on its bid, but EPH said its offer reflected the real value of the assets and liabilities attached to them.
German power prices have fallen by around 40 percent since Vattenfall first launched the sale.
"In the forthcoming years, unless the power prices will materially recover, the company will not be in a position to distribute any dividends and rather will generate a negative cash flow," Daniel Kretínsky, chairman of EPH, said of Vattenfall's lignite business. Two people familiar with the matter said the business was expected to lose up to 300 million euros a year before interest, tax, depreciation and amortization over the next five years. While Vattenfall has hedged about 80 percent of lignite-derived electricity sales this year at prices above the market, very little was hedged for 2017/2018, one of the sources said, adding the hedge was worth more than a billion euros in total. Separately, Vattenfall’s lignite operations face decommissioning costs of a nominal 4 billion euros by 2080, or 1.5 billion on a 2015 discounted basis, which has been accounted for in the offers, the people said.
EPH's assessment of the assets' enterprise value - not accounting for the hedge - is negative, a person familiar with the bid said, adding that EPH had still offered a positive purchase price after taking into account the hedge. Other sources familiar with the matter had said that bidders had been looking to seek a transfer from Vattenfall of 1.2-1.4 billion euros to cover the future liabilities. Another Czech firm, power utility CEZ, said on Wednesday it had decided not to bid due to falling power prices and uncertainty over the future for coal-fired plants in Germany.
Vattenfall has declined to comment on the bidding process, but has previously said it expects to make a proposal regarding the lignite sale to its owner, the Swedish government, during the first half of 2016. Ingvar Matsson, an analyst at Swedbank Markets, however, said he didn't expect Vattenfall to clinch a deal during the first half of 2016, but it was still possible later this year. "It could be still possible to see the deal by the end of this year if Vattenfall agrees with a buyer on transferring provisions set aside for plant and mine decommissioning," he told Reuters. Vattenfall has set aside about 14.5 billion Swedish crowns (1.57 billion euros) for future expenses of mining, gas and wind operations and other environmental measures in 2014, the latest numbers available show. Most of these relate to lignite decommissioning, Mattson said.
(Writing by Nerijus Adomaitis; Editing by Keith Weir, Greg Mahlich)