June 18, 2013 / 12:42 PM / 4 years ago

INTERVIEW-Price guarantee vital for CEZ Temelin nuclear project

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* CEZ’s CFO: no major acquisitions while focus on Temelin

* Seeks price guarantee through contract for difference

* Talks over guarantee to go on even during gov’t crisis

* Guidance for 2013 are company’s best estimates so far

By Jason Hovet and Jan Korselt

PRAGUE, June 18 (Reuters) - A deal with the Czech state to guarantee future electricity prices is crucial for power company CEZ to go ahead with the multi-billion dollar expansion of the Temelin nuclear plant, CEZ’s chief financial officer said.

Central Europe’s largest listed company is putting all its effort into the Temelin enlargement and will avoid any major acquisition, CFO Martin Novak said in an interview.

CEZ is due to pick a supplier this year to double the size of Temelin, the country’s biggest ever energy deal with an estimated cost of over $10 billion. The government wants the project to ensure that the Czech Republic can cover its energy needs for decades to come.

Uncertainty over the project’s timing increased this week when Prime Minister Petr Necas resigned after police raids landed his top aide in custody. The central European country faces the potential for unstable rule one year before scheduled elections.

Novak said discussions with the Industry Ministry on a so-called contract for difference would go on, however, and that this remained crucial in order to ensure a return on the project at a time when Europe’s utility sector is facing high uncertainty.

Under the plan, CEZ would receive compensation if prices dropped below a certain level but would have to pay the state if prices rose above that target.

“We definitely would strongly prefer this guarantee,” Novak said. He spoke at CEZ headquarters in a modern glass-and-concrete office park south of Prague’s historic centre.

“This is a strategic decision on whether the country wants it or not. Also on the other hand, bringing conditions for the commercial entity to do that is very important.”

SEEN TOO RISKY OTHERWISE

Analysts and shareholder critics have said that to go ahead with Temelin without a price guarantee would be a major risk for CEZ, which is 70 percent state-owned and whose shares have lost 43 percent in the past two years along with sinking power prices.

A drop in European wholesale power prices to below 40 euros per megawatt-hour and a murky outlook for future prices have eaten into the potential profits of nuclear projects and turned them into likely loss-makers.

Ceska Sporitelna said in a May 23 note that a price of 60 euro per Mwh in a contract for difference agreement would give CEZ better access to cheap financing.

With a price agreement, CEZ could begin serious talks to maybe bring another investor on board, Novak said, although he added CEZ could finance the project on its own. He said a 35-year guarantee would be reasonable.

U.S. Westinghouse, a unit of Japan’s Toshiba Corp, and Russia’s Atomstroyexport are bidding in a tender to build the project, which media in the former communist country have portrayed as West versus East. CEZ has asked both to improve bids before it chooses a winner.

Most political parties have backed Temelin’s expansion, and there has been little opposition from the public. If ruling parties fail to get backing for a new prime minister, however, the political uncertainty still could lead to delays in the project.

“It is hard to imagine making a final decision without knowing the stance of the major shareholder,” Novak said.

CEZ is the most profitable Czech company, with net income before adjusting for minority interests of 40.2 billion crowns ($2.1 billion) in 2012.

But profit has dropped by a fifth since 2009 and may not hit bottom until 2015 or 2016, analysts say. Novak declined to comment on analysts’ estimates or figures related to Temelin.

For 2013, CEZ has set guidance for net profit of 37.5 billion crowns and for earnings before interest, tax, depreciation and amortisation (EBITDA) of 81 billion. An additional 2 billion crown boost to net profit is expected to come from the sale of its Chvaletice power plant in the second half, pending regulatory approval.

“Those numbers that we have announced are the best estimates for the full year so far,” Novak said.

Temelin will remain CEZ’s main investment after scaling back ambitions abroad following the 2009 global economic crisis. CEZ is also more cautious after running into regulatory battles in Albania and Bulgaria in the past year, Novak said.

CEZ is looking mainly at investments in the Czech Republic, Slovakia, Poland and Germany.

“Those (are) four countries where we feel that the environment is much safer and predictable than in the Balkans,” he said. “(But) we are not looking at significant investment (abroad). All forces are dedicated to Temelin.” ($1 = 19.1871 Czech crowns) (editing by Jane Baird)

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