Czech-based EPH to boost generation fleet in deal for Vattenfall's German coal assets

Czech-based EPH to boost generation fleet in deal for Vattenfall's German coal assets
The deal includes 7.5GW of German generation capacity
By bne IntelliNews April 18, 2016

Czech/Slovak energy group EPH announced on April 18 that it has agreed a deal to acquire Vattenfall’s five lignite coal mines and four power plants in Germany. The holding will carry out the purchase via a consortium with PPF Investments, as reported earlier this month.

The deal sees EPH extend a long shopping spree around Central and Eastern Europe and further afield, in a strategy at least partially based on hopes the EU will pay for fossil fuel capacity to be mothballed. It further cements the closely-held group's position as among the biggest power players in Central Europe, and expands EPH’s presence in Germany, where it already owns brown-coal mining company Mibrag and some generation assets. In terms of power generation, the acquisition will expand EPH's capacity by just over 8GW to leave it at 21.5GW.

Meanwhile, despite PPF's apparent financing role, the deal will also only strengthen speculation over just how EPH is funding its ravenous appetite. The company is speculated to carry debt of around €5bn. Just one week ago, EPH said that it plans to sell a minority stake in its EPIF unit, which following a restructuring includes most of its major gas assets, through an IPO in London and Prague.

The agreed value of the Vattenfall deal is not clear, however. EPH said on April 18 that it has agreed on a new capital structure for the company owning the German lignite operations, which has liabilities and provisions of around €2bn, against which it operates fixed assets valued by the Swedish seller at €3.4bn, and will retain around €1.7bn of cash.

Vattenfall said second quarter results would see a charge of up to €2.9bn. The deal, which needs government approval, is set to close by August, Vattenfall said.

EPH clearly suggested in recent weeks that it hoped to buy the assets at cut price. "We... emphasize that we are fully mindful of [the] current economic condition of Vattenfall's lignite operations, including the fact that in the forthcoming years, unless... 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,” EPH chairman Daniel Kretinsky said in a statement in March. The €1.7bn in cash is reportedly a consideration for expected losses.

As part of the deal, the consortium has committed to waive dividends in the coming years. It will also assume the operation’s regulatory obligations, including provisions for decommissioning plants.

The Czech-based energy holding has been following a strategy driven by hopes for "capacity market" regulation. That would see the EU pay subsidies to operators of shuttered generation assets to keep them as back-up to new, cleaner capacity. Germany decided last year to put some of the country's lignite power plants in reserve starting in 2018. That includes 1,000 MW of capacity at the company being bought by EPH.

However, the buyer also says the purchase is driven by belief that German power prices are set to rise in the coming years as Berlin phases out nuclear. EPH board member Jan Springl said the energy market’s fundamental dynamics are set to recover in the mid-term, and EPH is “convinced that lignite is in a position to contribute successfully to the rapidly evolving German power mix”.

EPH is controlled by oligarchs from the Slovak financial group J&T (JTFG), while PPF Investments is the investment vehicle of Petr Kellner, the Czech Republic's richest man. Kellner sold a stake of over 40% in EPH in 2014. The consortium beat out German power group Steag and Australian investment fund Macquarie, which had reportedly asked Vattenfall for a large contribution as part of a joint bid.

Czech Coal Group, controlled by billionaire Pavel Tykac, and Czech state-controlled utility CEZ, had dropped out of the race ahead of the deadline to submit binding bids.