Results of other lignite unit sales in Europe not promising for PPC

Without a doubt, the main power utility PPC’s bailout-required sell-off of lignite units, a procedure whose market test is now in progress, will attract investor interest but the level of offers to be made remains uncertain. The results of recent lignite-unit sales agreed to in other parts of Europe are not encouraging.

The price levels investors will be prepared to pay for PPC lignite units, representing 40 percent of the utility’s lignite capacity, will determine the sale’s degree of success, as was recently pointed out by the power utility’s CEO Manolis Panagiotakis.

Prevailing market conditions, especially the EU’s decarbonization policy, do not encourage major lignite investments.

The sale, in 2016, of lignite units and mines in Germany by Sweden’s Vattenfall, one of Europe’s biggest energy firms, should serve as a good indicator for PPC. Vattenfall, which has moved to sell fossil fuel and lignite interests and instead focus on electricity generation through hydropower, wind and nuclear facilities, sold its German lignite units and mines to a joint venture involving the EPH energy group and the Czech Republic’s PPF Investments for a symbolic price of one euro, according to foreign media reports.

These lignite units, possessing installed capacity of 8,000 MW and annual production of approximately 60 TWh, employ over 7,500 persons, including workers at the mines. Half of this installed capacity concerns units that operated between 1980 and 1988 and the other half units that began operating around the millennium, making them about as old as the Meliti facility included in PPC’s sale package.

According to reports, the EPH- PPF Investments joint venture acquired assets valued at 3.4 billion euros, cash reserves of one billion euros, and also took on debt worth two billion euros. Vattenfall, the seller, posted losses of approximately two billion euros from the sale of these specific assets. Even so, Vattenfall’s president and CEO, Magnus Hall, described the sale as a good move, strategically and financially, given the current and future market conditions. The Vattenfall boss pointed out that losses would have been greater had the company continued to operate these specific units. He attributed his reasoning to dwindling wholesale electricity prices in Germany, prompted by the rapidly increasing role of renewable energy.

A discrepancy of roughly 0.4 billion euros between the net accounting value of these lignite units bought by EPH-PPF Investments and the sale-related losses reported by Vattenfall was made up by an additional electricity supply agreement.

Commenting on the deal, EPH chief Daniel Kretinsky noted that he buyer is fully aware of the current economic conditions and Vettenfall’s lignite-related activities, adding that, in the near future, EPH will not be able to offer dividends and may also experience negative cashflow, unless energy prices rebound considerably.