EPH reportedly set to win race for Vattenfall's German coal assets

By bne IntelliNews April 8, 2016

Czech-based energy group EPH is set to win the race for Vattenfall’s German lignite coal mines and power plants, newswires reported on April 8, citing unnamed sources.

A deal would expand EPH’s presence in Germany, where it already owns brown-coal mining company Mibrag. The closely-held group appears set to extend a long shopping spree around Central and Eastern Europe and further afield, in a strategy based on hopes the EU will pay for fossil fuel capacity to be mothballed. Meanwhile, speculation continues over how EPH is financing its ravenous appetite.

The deal for several coal mines and power plants is expected to be signed next week, a source told Reuters. The supervisory board at Swedish state-controlled Vattenfall is expected to give the final nod in about 10 days, another told the newswire.

EPH, which is controlled by oligarchs from Slovak financial group J&T (JTFG), was one of three suitors to submit a binding offer. While the bid is unlikely to be very close to the €2bn Vattenfall reportedly originally hoped to attract, EPH has still teamed up former major shareholder PPF - the investment vehicle of Czech billionaire Petr Kellner - as a financial partner.

Czech Coal Group controlled by billionaire Pavel Tykac, has dropped out of the race, one of the sources said. The company has been desperate to get its hands on generation capacity due to a long-running tussle with both EPH and state-controlled utility CEZ on the Czech market.

CEZ announced on March 16 that it had pulled out of the race for Vattenfall's assets, citing weak European power prices. However, EPH and CEZ have previously been accused of teaming up to prevent Czech Coal from gaining power assets, in a bid to suppress the price of lignite on the Czech market.

German power group Steag and Australian investment fund Macquarie asked for a large contribution from Vattenfall as part of a joint bid. That made the offer less attractive than EPH's, one of the sources suggests. 

Shortly after the report of EPH's apparent success emerged, Fitch Rating affirmed EPH's holding CE Energy firmly in junk at 'B+' with a stable outlook. The agency added that it will no longer cover the company.

Fitch is "withdrawing the ratings as CEE is undergoing reorganisation while its senior unsecured notes were recently redeemed in full and cancelled," the agency said in a statement. EPH plans to spin off a portion of its portfolio, and says it will look for a strategic investor or possibly make an IPO.

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 Vattenfall's capacity.

EPH clearly suggests it hopes to buy the assets at cut price, as part of that strategy. "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.

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