The latest financial report from Swedish electric utility Vattenfall shows how badly its German lignite (“brown coal”) operations have been hurting its business, just as the company prepares to sell the assets to a group of Czech buyers, analyst Gerard Wynn reports on the Energy and Carbon blog.
“Unusually, Vattenfall broke out separate results for the lignite business, ahead of its transfer to EPH and PPF Investments,” he writes, “revealing more insight into why it’s selling and raising the inevitable question why the Czech investors want it.”
Across all its operations, Vattenfall’s operating cash flow fell 56% in the first half of this year, to 7.2 billion Swedish krona (SEK). In the lignite business, sales were down 22%, operating cash flow fell by 1.4 billion SEK, and “free cash flow” decreased by 2.5 billion SEK, compared to a cash flow increase of 4.4 billion SEK in the rest of the utility’s operations.
“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,” Wynn writes. “German wholesale power prices in the second quarter fell to € 24.7 per megawatt hour (MWh), from € 25.1 in the first three months, and were down 13%, from € 28.3, year on year.”
Wynn says the outlook for the lignite unit could get worse, as power plants age and Germany puts greater emphasis on carbon reductions. “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.”