As the Swedish electric utility Vattenfall prepares to off-load its German lignite business to Czech investors, its second quarter results show how it’s suffering from lower power prices, and its lignite in particular.
Unusually, Vattenfall broke out separate results for the lignite business, ahead of its transfer to EPH and PPF Investments, revealing more insight into why it’s selling, and raising the inevitable question why the Czech investors want it.
The main problem is continuing falling wholesale power prices in Central Europe, as a result of low coal prices and continuing deployment of zero marginal cost renewable power. German wholesale power prices in the second quarter fell to 24.7 euros per megawatt hour (MWh), from 25.1 euros in the first three months, and were down 13%, from 28.3 euros, year on year, said Vattenfall.
The most visible result was a collapse in cash flow from operating activities (based on operating profit, excluding asset impairments), across the whole Vattenfall group, in the first half of 2016, down 56% year on year to 7.2 billion Swedish Krona (SEK).
For the first six months, the lignite business showed:
- Sales down 22% year on year, to 8.7 billion SEK.
- Maintenance investments of 1.1 billion SEK, or about a fifth of the Vattenfall group total; by way of comparison, lignite contributed 31% of total Vattenfall electricity sales of 88.7 TWh, in the first six months.
- Negative cash flow from operating activities, at -1.4 billion SEK.
- As a result, a net drain on cash available (“free cash flow”) to Vattenfall’s wider investment and financing, with a free cash flow of -2.5 billion SEK in lignite, compared with a positive free cash flow across the rest of the group of 4.4 billion SEK.
All that helps explain why Vattenfall made an even bigger impairment charge on its lignite business (reflecting lower value, from lower expected future revenues), of 21.5 billion SEK in Q2 2016, compared with a hit of 15.2 billion SEK in the same quarter last year.
And it explains why Vattenfall claimed its latest impairment charge would have been even greater, at 35-40 billion SEK, had it retained the asset.
As Vattenfall’s chief financial officer, Ingrid Bonde, said on Thursday – “The lignite operations are having a tough financial time. That was the rationale for us divesting it.”
It’s conceivable that the lignite unit’s problems will only get worse, as the power plants age, and Germany looks to meet ever more ambitious targets to cut carbon emissions. For example, Berlin last year proposed to force older lignite power plants to buy more pollution permits per tonne of emissions than other fossil fuels, under the European Union’s carbon market, a proposal the European Commission may now support.
But the Czech investors clearly don’t see such a deterioration. They expect to make money from a loss-making asset with cash of 9.4 billion SEK, and mine reclamation and pension liabilities estimated by Vattenfall of 18 billion SEK. Unfortunately, as privately held investors, they may never spell out their approach publicly, with a Vattenfall-style presentation like that on Thursday.