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UPDATE 1-Fortum puts Polish, Baltic district heating assets on the block - sources

(Adds PGNiG comment)

FRANKFURT/HELSINKI, Sept 24 (Reuters) - Finnish state-controlled utility Fortum has put its district heating assets in Poland and the Baltic states up for sale as it seeks to streamline its business, people close to the matter said.

The company has requested first-round bids by the end of the month for the unit, which could be valued at more than 1.5 billion euros ($1.8 billion), including debt, they said.

District heating, through which heated water from a central plant is distributed around a region via a network of insulated pipes, is seen as a greener alternative to conventional heating systems. However, it may still use fossil fuels.

Under pressure from the Finnish government to reduce its fossil footprint, Fortum is divesting its district heating businesses in several countries to free up capital for investing in new, eco-friendlier energy facilities.

Polish gas firm PGNiG and a swathe of infrastructure investors are expected to take part in the auction, attracted by the stable returns that district heating assets generate.

“We will be analysing various investment options for further acquisitions in the area of energy and heating,” PGNiG said in response to a question on whether it was interested in buying Fortum assets.

Fortum’s district heating activities in the four countries are expected to post annual earnings before interest, tax, depreciation and amortization of about 120 million euros and may be valued at more than 13 times that, one of the people said.

Due to its exposure to coal, investors are asking for a discount compared to assets such as Scandinavian peers Nevel and Adven, which are currently up for sale and expected to fetch valuations of more than 15 times their core earnings.

Fortum is working with investment banks Rothschild and Porta Finance on the divestiture, the people said.

Fortum, Rothschild and Porta Finance declined to comment.

In Poland, Fortum provides district heating in five cities and operates two multi-fuel combined heat and power plants. In 2019, the sale of 3.3 terawatt hours (TWh) of heat and 0.6 TWh of power generated EBITDA of 43 million euros.

In the Baltics, Fortum provides district heating in five cities in Estonia, Latvia and Lithuania. In 2019 its sales of 1.5 TWh of heat and 0.6 TWh of power there generated EBITDA of 66 million euros.

The company said in February it would review a possible divestment of its district heating and cooling businesses in Poland, Estonia, Lithuania, Latvia and Jarvenpaa, Finland.

In July, it agreed to sell the Jarvenpaa activities for 375 million euros and in August said its 50% holding in Stockholm’s district heating and cooling company Exergi was also up for sale.

$1 = 0.8580 euros Editing by Jan Harvey and David Evans

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