Bloomberg News

Stalemate Hits $10 Billion Czech Nuclear Plan on Funding

March 15, 2012

CEZ wants to build the power generators at its existing two-reactor Temelin plant, seen here. Photographer: Vladimir Weiss/Bloomberg

CEZ wants to build the power generators at its existing two-reactor Temelin plant, seen here. Photographer: Vladimir Weiss/Bloomberg

The Czech Republic’s $10 billion plan to build two atomic reactors near the German border that could supply electricity to the Bavarian industrial heartland is unraveling over financial and pricing disputes.

CEZ AS (CEZ), Europe’s only utility with an atomic project out to bid, is beset by falling power prices and predictions that its financial muscle is too weak to safeguard investors. The Prague- based power company’s two most senior executives clashed last month on how to fund the reactors.

“The project simply won’t be financially profitable,” said Ivan Kotev, an analyst with Prague-based advisory firm Candole Partners who co-wrote an economic feasibility study of the plan in January. “It’s unrealistic,” Kotev said in an interview.

The developments are a blow to nuclear contractors Areva SA (AREVA) of France, Toshiba Corp. (6502)’s Westinghouse unit and a Russian-Czech consortium. Each is preparing bids by a July deadline that will offer to build their latest model of reactor which, in each case, has yet to run at an operating nuclear station.

CEZ and the state insist they will proceed with the project. That’s a break from Germany, Switzerland and Italy, which closed nuclear plants or canceled projects last year after the Fukushima disaster in Japan. CEZ wants to build the power generators at its existing two-reactor Temelin plant.

Germany’s plan to shut down all of its 17 nuclear reactors by 2022 will create need for more reliable electricity sources in Europe, according to Matthias Heck, a Frankfurt-based energy analyst at Macquarie Group Ltd. Temelin stands less than 40 miles (64 kilometers) from the border with Bavaria, the German state that’s home to carmaker BMW AG and engineer Siemens AG.

Unreliable Clean Power

“In the longer term, there will be a need for new plants producing baseload power,” Heck said in a telephone interview, referring to electricity delivered around-the-clock. “Renewables are growing fast, but they are unreliable. Nuclear is a backbone of power generation.”

The Temelin project may not be able to pay itself off given low prices of power and carbon dioxide allowances, which aren’t expensive enough to encourage utilities to switch to emission- free technology, Macquarie’s Heck said.

Czech power prices for next-year have declined 5 percent in the past year to about 50.75 euros a megawatt-hour.

German power prices for next year, a regional benchmark, have declined 10.1 percent in the past year to about 52.50 a megawatt-hour. Carbon emission permits have dropped 54 percent in the same period to just more than 8 euros a ton.

Shares in CEZ have dropped about 2.4 percent in the past 12 months, compared with a 2 percent gain in the Dow Jones Emerging Markets Titans Utilities 30 index.

7 Billion-Euro Financing

To pay for Temelin, CEZ would have to borrow more than 7 billion euros ($9.1 billion), which would raise its debt-to- equity ratio above the average among its European peers, according to the Candole research.

Both CEZ and the Czech government -- which controls 70 percent of the company’s shares -- say they are determined to see the project through. Yet they are sending confusing signals about how they plan to pay for it.

CEZ Chief Financial Officer Martin Novak said in an interview last month that the company may consider bringing in another investor to share the risk. He was rebuffed by Chief Executive Officer Daniel Benes, who told Bloomberg on Feb. 28 that “there is no other plan” than to finance Temelin entirely out of CEZ’s pocket.

Industry and Trade Minister Martin Kuba said in a Feb. 12 TV debate that CEZ should finance the expansion on its own even if it means paying out a smaller dividend.

Outside Investor?

“Bringing in an outside investor is an option that CEZ would be wise to explore,” said Bram Buring, an analyst at Prague-based brokerage Wood & Co. “It’s not uncommon that investments of this scope are shared. CEZ would be foolish to close any options.”

CEZ’s dividend policy has been to pay out between 50 and 60 percent of net profit. The company pays about $1 billion a year to the state budget, about 2 percent of the Czech Republic’s yearly revenue. Slashing the dividend would put a dent in the state’s coffers.

The enormous price tag, probably combined with high insurance premiums and interest rates, will make it necessary for CEZ to seek state help at the expense of consumers and small shareholders, Kotev said.

CEZ is exploring ways to make the state share the risk by giving guarantees on loans and setting purchase price of electricity produced in nuclear plants, according to Novak.

“CEZ’s main shareholder is the state, and the state is not always a rational investor,” Kotev said. “This is not a good deal for minority shareholders.”

Westinghouse, Rosatom

The company, with a $23 billion market value, the seventh- largest European Union power utility by that measure, plans to pick a contractor to build the reactors next year.

Areva is competing against Westinghouse Electric Corp. and a Russian-Czech consortium led by Rosatom Corp.’s unit Atomstroyexport for the contract.

CEZ’s technical requirements are “very tough,” said Thomas Epron, Areva’s manager for the Temelin project.

Areva is offering its 1,650-megawatt EPR reactor, currently under construction in Finland and France. Both projects are years behind schedule and over budget by billions of euros Westinghouse is pitching its AP1000 design and Rosatom is offering to build the VVER 1200 design.

The Russian company is also facing delays at its Rostov project. All three companies must submit their bids by July.

Even with the bidding process well under way, it’s not certain that CEZ will end up choosing any of the three suppliers, said Vaclav Bartuska, the Czech government’s special envoy for nuclear energy. The Czechs want to see the reactors up and running before they make a decision, and that’s not the case with any of the designs so far, he said.

“There is a possibility that CEZ won’t accept any of the bids,” he said in an interview in Prague. “To be honest, at this point not one of the three bidders has convinced us he can build on cost and on time.”

To contact the reporter on this story: Ladka Bauerova in Paris at lbauerova@bloomberg.net

To contact the editor responsible for this story: Will Kennedy at wkennedy3@bloomberg.net


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