Vattenfall sells German lignite assets to Czech EPH

STOCKHOLM/PRAGUE (Reuters) - Czech investor EPH has agreed to buy the loss-making lignite coal mines and associated power plants in Germany from state-owned Swedish utility Vattenfall as it bets on a recovery in European power prices.

EPH, which teamed up with Czech private equity group PPF Investments, expects power prices to rise in Germany at the start of the next decade due to a phase-out of nuclear power production. It already owns lignite assets in Germany.

The sale, which still needs to be approved by the Swedish government, would reduce Vattenfall’s electricity output by about 30 percent, but also cut its carbon emissions by about 70 percent, making it one of the greenest utilities in Europe, the Swedish company said.

“On a mid-term perspective, the fundamental dynamics of the energy market are set to recover ... we are convinced that lignite is in a position to contribute successfully to the rapidly evolving German power mix,” Jan Springl, board member of EPH, said.

German power prices have fallen by around 40 percent since Vattenfall launched the sale in 2014, while Berlin has taken measures to reduce output from polluting lignite plants to reach its national climate targets.

The Swedish company said the sale had been driven both by its strategy to reduce exposure to CO2 emissions and by the risk of power prices staying low.

“It’s strategically and financially right,” Vattenfall’s Chief Executive Magnus Hall told a news conference.

The value of the deal to sell stakes in four lignite power plants with a combined capacity of about 8,000 megawatts and five open-cast mines in eastern Germany was not immediately clear.

Both Vattenfall and EPH declined to disclose the deal’s value, with some market sources saying it was symbolic.

EPH said the deal involves taking over 3.4 billion euros’ ($3.8 bln) worth of assets and 2 billion euros in liabilities and provisions, including for future decommissioning of power plants and mines.

Vattenfall will also pay EPH about 1.7 billion euros in cash which should enable the business to continue for several years until an expected price recovery takes place, EPH said.

Meanwhile, Vattenfall will retain 9 billion crowns (980.22 million euros) in forward power sales contracts for 2016-2019, receiving cash as those contracts get settled over time, its Chief Financial Officer Ingrid Bonde said.

The company has initially planned to transfer the hedges made to secure the electricity price for its lignite operations to the buyer, but could not do for tax reasons, which made the deal more complicated, she added during a call with analysts.

No payment of dividends or dissolution of any reserves or similar transactions will be possible during the first three years, Vattenfall said.

The Swedish utility said the divestment will have a negative impact on its second-quarter income to the range of 22-27 billion crowns ($2.7-3.3 billion), but retaining the assets could have meant bigger losses.

Danske Bank credit analyst Jakob Magnusson said another disadvantage of the deal was that Vattenfall’s production portfolio would be less diversified and it would depend more on its domestic Nordic market.

“The deal is negative for the profit and loss line, but from the credit risk perspective it’s fairly neutral, and above all they are reducing their carbon footprint quite dramatically,” said Swedbank’s analyst Ingvar Mattsson.

Vattenfall has said its carbon emissions should fall to below 25 million tonnes per year from over 80 million tonnes as a result of the lignite sale.

However, the sale of lignite assets in Germany has drawn criticism from environmentalists and some lawmakers of Sweden’s Green Party, a junior member of the Social Democrat-led government, who called for the polluting plants to be shut instead.

The Swedish branch of environmental organization Greenpeace also said the plants should have been shut down and said the sale was a catastrophe for European climate policy and tarnishes Sweden’s environmental reputation.

Vattenfall said it expected to finalize the deal by the end of August pending government and regulatory approval.

(This story corrects Green Party’s affiliation in 3rd last paragraph)

Additional reporting by Niklas Pollard and Sven Nordenstam in Stockholm, Nerijus Adomaitis in Oslo, Christoph Steitz and Arno Schuetze in Frankfurt, editing by Susan Fenton and Louise Heavens