CEZ scales back new investments in tough power market

Sunday, September 29, 2013

PRAGUE, Sept 25 (Reuters) - CEZ is taking a wait-and-see approach to new investment as low power prices pressure energy companies and will scale back renewable plans due to an uncertain regulatory landscape, the Czech utility's chief strategy officer said.

Pavel Cyrani, also a CEZ board member, told the Reuters Eastern Europe Investment summit on Wednesday that a cautious approach was necessary to allow central Europe's biggest utility to remain healthy in current tough market conditions.

"For any kind of further growth either in the Czech republic or abroad we are in the wait and see mode," Cyrani said at the summit. "We are consolidating positions where it makes sense and not growing much beyond that."

European utilities like CEZ are squeezed by tepid electricity demand and weak wholesale power prices that have hit all-time lows in recent months.

The benchmark front-year contract has tumbled from a peak of more than 90 euros per megawatt hour in July 2008 to below 40.

Wholesale prices since have picked up but Cyrani viewed this as partly driven by expectations a new German government would support conventional power generation rather than a recovery in real demand that could spur investment.

"Our head room for further investments is decreased, therefore we have re-evaluated many of our plans," he said.

Majority state-controlled CEZ also plans to reduce its renewables investments in the region. Cyrani said reaching a target of 3,000 MW of renewable capacity would not happen soon.

CEZ has launched a 600 MW wind farm in Romania but Cyrani said a plan to enlarge its wind portfolio in Poland would be slowed due to a lack of demand and a murky regulatory landscape.

"We are not fully preparing to build the 700 MW even if the regulation was favourable," he said. "We will start with 100 MW or 200 MW and see how it goes."

The utility will also only look to build on its distribution and generation assets in Turkey through expansion rather than acquisition, Cyrani added.

Legal changes in places like Romania - where a recent shift in a green certificate scheme will delay up to 66 million in annual profits from wind farms until 2018 to 2020 - is another reason to keep a leash on foreign investment, he said.

"In the mid-term, we do look at Turkey in an opportunistic way," Cyrani said. "In terms of long-term strategy we are more committed to the Czech Republic and central Europe.

"In general, in the next three to five years we don't see the share of foreign (operations) increasing."

One area where CEZ will remain focused, Cyrani said, is on expanding the Temelin nuclear power plant, a multi-billion project that is the Czech Republic's biggest ever public tender.

The utility has delayed picking a builder until the end of next year or 2015 as it negotiates with the Czech state to guarantee future electricity prices.

Analysts and shareholders have said that to go ahead with Temelin without a price guarantee would be a major risk for CEZ. The project could also hit CEZ's dividend in the future. The company's current a payout ratio is 50-60 percent of net profit.

Cyrani said CEZ might have to look at its dividend policy only in the final seven to eight years before the new Temelin units go online, something not expected to happen before 2025.

"It is clear that the last seven to eight years before finally going online with the (Temelin) project, that is where most of the investment is being paid," he said.

"Going through this period we would definitely need to tighten all the money leaving the company ... so OPEX, CAPEX and dividend policy."

Cyrani also said CEZ's gas assets were most at risk of writedowns in an ongoing review.

Analysts have predicted a writedown could come from CEZ's gas-fired Pocerady plant but CEZ officials said last month they did not expect one this year.

"We are still working on it," Cyrani said. "Obviously the assets under a bigger risk are gas assets." He said that he did not see any other extraordinary items appearing in 2013 results.

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