Friday, March 24, 2017

Coal to Cotton Candy

Europe appears to be ahead of the U.S. and China in orchestrating a soft landing for coal mine employees while bringing an end to the catastrophic impact of burning coal on the environment.  The most recent post “German Policies Leave U.S. in (Coal) Dust”, describes plans to convert a coal mine in Germany’s fabled North Rhine-Westphalia area into a pumped hydro-energy storage facility.  Not to be outdone by its neighbor, a small start-up in the Netherlands wants to turn the 630 megawatt Hemweg 8 coal-fired power plant into a theme park.
Electricity retailer Vandebron Energie B.V. had already turned some heads in the Netherlands with its first-of-a-kind online marketplace that helps consumers buy directly from renewable energy producers.  Now the company proposes to undertake a project that is even more creative.  Not everyone is impressed with the idea.  Vandebron’s intital bid of one million Euros was turned down by the owner of Hemweg 8, the utility producer Nuon.  However, a pledge by the city of Amsterdam to double Vandebron’s bid has got Nuon’s leadership coming back to the table.

The Hemweg 8 plant is among the dirtiest in Europe.  There are few arguements to save it.  According to Nuon, the plant could burn about 2.3 tons of coal per day when operating at full capacity.  That would spew out as much as 13,000 pounds of carbon dioxide per day.  Even Nuon is not particularly committed to the plant even though it is permitted to operate for another 17 years.  The problem is the economics of continuing power production at Hemweg 8 considering how much it would cost to bring it into sound environmental operation as a coal-fired plant.  Nuon had already revealed plans to either sell the plant or shutter it after a bid failed to convert to a lower-carbon fuel source.  With Nuon's back against the wall, it would seem Vandebron is in a good place to negotiate.

Since Vandebron is privately held, the coal-to-cotton candy play would have to be made through Nuon’s parent company, Vattenfall A.B., which is a European energy company with operations in Scandinavia, Western Europe and the United Kingdom.  Unfortunately, Vattenfall A.B. is 100% owned by Sweden’s government, leaving only company's bonds trading in the public market.  Vattenfall has Swedish kroner 96.7 billion in total debt, which has an average maturity of 8.5 years.  Standard & Poor’s rates Vattenfall debt at BBB+, while Moody’s applies an A3 rating.  Strong ratings make it possible for Vattenfall to get by with 4.4% in average annual interest obligation.  The risk return profile of Vattenfall's debt is attractive and environment-conscious investors get the extra comfort of knowing Vattenfall's subsidiaries are at least attempting to 'clean up'.

Neither the author of the Small Cap Strategist web log, Crystal Equity Research nor its affiliates have a beneficial interest in the companies mentioned herein.

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