CEZ, a. s. (CEZ) Earnings Call Transcript & Summary

Dear ladies and gentlemen, welcome to the conference call of CEZ Group regarding the H1 2020 Results. At our customers' request, this conference will be recorded. [Operator Instructions] May I now hand you over to Barbara Seidlová, who will lead you through this conference. Please go ahead, madam.

Hello, everyone, and welcome on our regular quarterly call. I will hand over to today's speakers right away. I have Martin Novák here with me and Pavel Cyrani, as usual. Now I'm handing over to Martin.

Good afternoon. Good morning, everybody. So I will guide you through the financial part of the presentation. Starting at the first slide, which is a table summarizing our key data for first half of 2020 comparing to 2019. Basically, in all financial line items, you can see growth, starting from revenues going through EBITDA, where our growth is more than 11% year-on-year; net income, 9% growth; adjusted net income, 16%; operating cash flow, about 11% higher; and CapEx, about 5%. Our installed capacity went down by 900 megawatts. As of at the end of June, we decommissioned one of the old plants, Prunérov. We also have lower mining activity, mainly due to lower output to Czech plants in our portfolio, which I will touch on later on. And all other metrics is fairly in line with last year, second quarter being partly impacted by lower consumption and distribution of electricity due to COVID situation. So when we look at the next slide, actually, you can see year-on-year change in EBITDA by segments. Basically all segments but mining are growing. As I already said, mining actually was going down because we had less offtake from our coal mine and also from our power plants and also one of our customers' goods sold to a competitor who also owns coal mining company, and they basically started supplying themselves rather than from ourselves. General traditional energy -- generation traditional energy is up CZK 2.9 billion, mainly because of higher power prices year-on-year, CZK 5.8 billion and better profit trading results. We also -- on the other hand, we had negative CZK 2.2 billion coming from higher expenses related to carbon credits as we get less and less of them for free, basically none in 2020, and the prices are higher than in 2019. We also had lower generation volume partly due to shutdowns in nuclear plants that were planned and -- but most of them were actually planned for first half. So year-on-year, the number in nuclear generation should be basically identical as in 2019. But on the first half, there was a drop in power generation. Similar situation in traditional generation from our thermal plants. We had a few shutdowns, and we also had a few situations when we were optimizing the power plant and it was cheaper to buy power at spot market rather than making it at a -- generating it at our power plant. So then generation new energy, positive CZK 400 million; distribution, CZK 0.5 billion positive; and sales, CZK 1 billion positive compared to 2019. When we look at line items that are below EBITDA, we had a little bit higher depreciation and amortization and impairment, mainly due to higher impairments of our fixed assets in Romania and decrease of goodwill in Poland. We had also higher depreciation as such due to higher CapEx in the past, mainly a distribution company and then CEZ, the parent company and the Romanian distribution assets. Otherwise, all other items are very similar to last year. We are looking at net income of CZK 14.7 billion and adjusted income, CZK 16.4 billion. The difference between net income and adjusted net income is coming actually from impairment of fixed assets in Romania of CZK 700 million; Bulgaria, CZK 600 million; and goodwill in Poland, CZK 400 million. Our debt position and financial strength, you can see it actually on next slide. Our net debt-to-EBITDA as at June 30 was 2.4, so way below our target of 3 -- maximum target of 3. We have about CZK 31 billion in committed credit facilities. We are drawing only CZK 2 billion of committed ones. We have paid on June 29 some bond issue of EUR 750 million, so we have nothing to repay this year. We also actually draw credit facility from EIB of EUR 330 million. As of June 20, actually, we utilized EUR 150 million. Then we paid a dividend actually on August 3. In total, it's about CZK 18.3 billion. And we also extended payment of 2015 dividend by the end of 2020. Normally, it would expire sometime at the end of July. Annual meeting was held actually on June 29. You can see what was actually approved. So apart from traditional points, agent items like approval of financial statements. We decided -- or shareholder meeting decided to distribute a dividend, which is 97% of net -- adjusted net income for 2019. The dividend per share is CZK 34. It should be already deposited on our shareholders' account. The extended contract for Ernst & Young for 2020 and update a few more, I would say, administrative steps that had to be decided by the shareholder meeting. Now I would like to hand over to Pavel Cyrani who will tell you more about our nuclear project and actually the state of the matter where we are today.

Martin, thank you. I have on the following slides several highlights from specific business areas, business topics. The first one is the progress on preparing the new nuclear unit facility in the Dukovany site -- on the Dukovany site under name of the Dukovany II. On July 27, first, the government discussed the act on measure for Czechia's transition to low carbon energy, which enables the government eventually, once it's approved, to conclude an offtake contract with CEZ and also allows the government to finance partially the construction through debt provided to the project. Now this draft law was then submitted by the government to Parliament of the Czech Republic, and it should be discussed in the parliament in the second half of this year. If things go fast, it could be approved and effective as of 1st of January. If it goes a little bit slower than sometime within the first half of 2021. The second big event of the last weeks was on July 28, the day after, when the Minister of Industry and the Vice Prime Minister, Mr. Karel Havlícek, signed on behalf of the Czech government, 2 agreements with CEZ and Elektrárna Dukovany II, which set the conditions for the construction of a new nuclear power plant in -- on the Dukovany location. What needs to be said that although it has the name and the goal of eventually constructing a new nuclear power plant that currently signed contract is -- sets the rules and the conditions for a so-called stage 1, which should be finalized by mid-2024 with obtaining a siting permit and selecting a technology supplier for the new nuclear facility, and only then will be the decision made on the next stage by signing the contract, once the conditions for the stage 2 are agreed between CEZ and the government. So what this contract contains are obligation for CEZ, and that is to duly and properly work on obtaining the siting permit and other permits needed in the space and also running the tendering procedure. What also it gives to CEZ is the reassurance that CEZ has a clear way to obtain its incurred costs back in case there is, for example, no offtake contract prepared and signed and so forth, and that is by actually selling off the SPV of Elektrárna Dukovany II for the amount, which covers the incurred costs, both until today and also between today and the mid-2024 deadline. Now we will be working on obtaining the permits and preparing the tender. What is on Czech government's side is to initiate the notification discussion with the European Commission because this contract and the future contracts are expected to be qualified as state aid, and we need to defend that it's an allowed state aid. So that's on the nuclear. We have also news on the regulatory parameters for the -- for CEZ Distribuce, our Czech distribution assets. The energy regulatory office approved parameters. I think there are some good news [indiscernible] to us also for our investors. The one is that there is now a clear agreement and clear way to the adjustment of the regulatory asset base to -- equal to total residual value. As of today, the RAB actually accounts for about 82% of the residual value of the asset, and then there is a trajectory towards 2025 when it should reach 100%. So through that increasing EBITDA and profits of CEZ distribution. The pretax WACC was agreed at 6.54%, a little bit lower compared to the last period, but this was expected due to the very low interest rates and risk-free rates. Also, what is a good news for the distribution and for us is that there is an agreement on an increased investment plan, which should reach up to CZK 14.5 billion, and this investment we'll then obviously receive the return on those. And it is our goal and also the regulatory office wish that we invest the increase of the investments into the digital technologies, so smart grids, and that is what we will be doing. Now on the generation side, there's no new information on the regulatory. We are expecting the core commission to announce its growth and target probably by the end of this year. The original date was September, but it was hinted -- it was not yet officially announced but hinted that the commission will take somewhat longer, and it will be only by the end of the year, obviously, among others, caused by the period of COVID-19 standstill, and the work didn't progress much. In any case, we are working on our strategy to reduce significantly CO2 emissions. As you see on the Page 9, we are down by almost a quarter since 2016. Our CO2 emission factor already today is below the new CCGT plant emission factors. And in the next 20 years, it will be reduced further. The next big step is by 2025 and then gradually down to almost 0 2040 and 0 by 2050. So that's on carbon emission. Martin already mentioned some of the developments on the CEZ Group divestment activities. We are still working on our process in Romania. We have received the binding bids at the end of June, and these have been evaluated, and then negotiations are currently underway. In Bulgaria, we have good news for us, and that is that the administrative court in Sofia decided on July 22 that the decision of the Bulgarian commission for the protection of competition is annulled -- nullified, and now the commission must kind of take the case again and issue a new decision. In Poland, we are continuing with the sale of Polish wind projects in the development phase, with 2 projects of Krasin and Sakówko completed in last quarter, second quarter, and the sale of the remaining 4 projects expected by the end of 2020. The sale of our coal assets in Poland is preliminary planned for -- the progress of which is for the second half of 2020, and then the closing will run into 2021. Now obviously, here, you see that we are, as one of the strategic goals, refocusing our activities into Czech Republic and the closer Central European region to achieve larger synergies between our activities and also operate in a more investor-friendly environment. You may ask that we are in Poland and Romania leading the renewable assets, what is the story there. We are working hard on preparing for the renewable development into Republic. The legislation on which is being implemented for the nonphotovoltaic power plants. Auctions are being prepared by the government for the photovoltaic. It will not be through auction, but rather through the modernization fund, potentially through the [ CEZ transition ] funds. And again, as we follow the progress, the calls or the rules for receiving the investment subsidies for this are being prepared, and we expect them to be -- the first round, the first calls to be announced end of or beginning of -- end of this or latest the first half of second -- of next year. And then we'll be ready to start putting -- or building first projects in Czech Republic. Now we are focused on photovoltaic. As for Turkey, we continuously monitor the interest of mostly local investors, but no negotiation is currently proceeding to the binding stage yet. Obviously, again, here also all the terminal around COVID-19 slowdown, most of the business activities around this. Now specifically, business activities of the last quarter from the energy services and also Inven Capital areas. We have acquired the remaining 49.9% share of a JV developing small CHPs in the Czech Republic. We have established this JV in 2011, currently operate about 112 megawatts of electrical capacity. And we've now consolidated 100% ownership of this. On the side of Inven Capital, our colleagues there sold the share in the Israeli company, CyberX to Microsoft. And one kind of point of interest is that also a company from their portfolio, SunFire, participates in a project bid that aims to replace the aviation gasoline with clean hydrogen fuel. So we are trying to also follow the newest trends there and then either make profit of those and also kind of bring the know-how into the group and then develop it in -- mostly in one of the energy services companies. A couple more highlights on Page 12. We obviously have nuclear safety as one of the 2 priorities all the time and all the way. So both of our nuclear power plant defended the title of Safe Company. We have also made some bigger refurbishments in Temelín. We've replaced the steam separator. We're also working on our cost saving program, which we discussed on a number of the previous calls. We are finishing some of the later measures, one of them is the merger of one of our internal services companies, CEZ Korporátní služby, which is maintaining our car fleet and also our buildings. So we are merging this into CEZ as of January 1, 2021, aiming to achieve further cost savings. And we have also completed a new corporate data center into Tušimice and migrated all the [ data ] plan. We'll be then shutting down the older data centers that we had in other locations, again, achieving cost savings but obviously also higher quality for everybody using the data center. So this is from the latest developments. And for the financial performance of the business segments, I hand over back to Martin.

Okay. Thank you, Pavel. So I will very quickly run through our segment presentation. The first segment, generation traditional energy, improved year-on-year by CZK 2.9 billion or 17%, mainly, as you can see, due to results in the Czech Republic, basically only because in Czech Republic. The main driver are higher prices of generated electricity due to our hedging. As you will see later in the presentation, we had additional income from so-called overhedge, which is difference between Czech and German power prices where we sell power -- or hedge power on the German power exchange due to the depth of the market that may not be available in the Czech Republic, especially when you look at 3 years' time horizon. Then we actually closed the position in Germany and immediately open it in the Czech Republic. And now when the power prices in the Czech Republic are higher than in Germany, we have additional profit. It is flowing through P&L straightaway because the hedge is no more effective. Lower generation at nuclear plants, CZK 1 billion, as I already said, due to power -- due to plant actually shutdowns where most of them were carried over the first quarter. Other facilities, CZK 800 million negative, as I already commented as well. We had higher expenses on carbon credits, CZK 2.2 billion; maintenance of CZK 300 million at nuclear plant; higher heat sales of CZK 300 million. Those are the main factors actually of the improvement. When you look at the next slide, you can see the generation for first 6 months where our coal generation was down by 15%, with explanation provided under the chart. Nuclear, 6% and other, which means mainly CCGT and hydro power plants, was up by 23%. So year-on-year decrease is 8%. On a full year basis, we expect basically to catch up on the nuclear side and be even on the CCGT and hydro, and we would expect slight decline on coal. One of the factors is that we actually shut down as of 30th of June Prunérov 1 power plant, which was quite significant installed capacity. And we will also have lower product power generation at 3 other plants and also outages at [indiscernible] plant. So that's the [ traditional ] generation, conventional. Then new energy, we had an increase of CZK 400 million, mainly coming from Romania and Germany. On next slide, you can see actually the generation was year-on-year on new energy, 5% higher. On full year, we expect 8% higher to 2.4 terawatt hours. And an increase basically in Romania, mainly due to standard weather conditions, wind conditions in 2020 versus relatively poor wind conditions in 2019, which is the key driver for the 10% increase. Same thing in Germany where we have a 12% increase, driven mainly again by relatively poor wind conditions in 2019. Sales segment in the Czech Republic, CZK 500 million improvement. And in the remaining countries, another CZK 500 million improvement in total. It's mainly about higher margin on commodity sales. ESCO companies, we have an increase of 16% year-on-year. Partly, it's an organic growth, partly, new acquisitions, both in Germany and Poland. We have -- year-on-year, we actually are showing growth of 9%, but we have an influence of COVID situation where sales will definitely be lower. So something like they will be basically halfway between 2019 and original plan as of March 17. So instead of growing 18%, we'll be growing just 9%. It's mainly due to postponing of a few projects with our clients. Also, a few acquisitions were on the table, and they got delayed because of COVID situation and so on. Distribution business, again, CZK 0.5 billion improvement year-on-year, which is relatively small variance on almost CZK 11 billion of EBITDA. Again, the details are provided in the slide. Mining, I will touch on mining, CZK 800 million lower, mainly due to lower sales to CEZ Group, which is CZK 0.5 billion, and also external customers, which is CZK 200 million. Other business is basically flat. Now annual outlook, I will hand over to Pavel, and he will guide you through last slides of the presentation.

Okay. Thank you. So first of all, one of the main drivers of our annual outlook is on Page 23, which is the current situation in hedging. We continue with our 3-year forward hedging. Today, we are 71% sold for 2021 at a little bit over EUR 46, which -- it's a little bit couple of cents drop compared to the average price that we reported last quarter, but not a significant one. So I guess our forward hedging guided us through the significant price drop in electricity that we saw during the COVID-19 standstill. A similar story on the emission allowances, today hedged at EUR 19.5. So also there, it's -- again, a little bit higher on this side compared to the last quarter but significantly below the current market prices that we compare to in the market. This all leads us to the outlook for 2020. We are improving the outlook a little bit. For the EBITDA, we are improving the outlook to CZK 62 billion to CZK 64 billion. We currently see that the impact of COVID-19 is lower than we expected. We also see higher revenues from the commodity trading than we normally plan, as kind of the business-as-usual. So all this combined, we improved the lower range of our outlook. We also improved -- and that also for the upper range, the net income, so increasing it to CZK 21 billion to CZK 23 billion. And on the top of the business drivers that I mentioned, we also include the estimated revenue of CZK 1.5 billion in second quarter as a result of a core decision regarding the CEZ's right to interest on arrears in connection with the refund of the part of the paid gift tax on emission allowances for 2011 and 2012. So -- and it's impacting only the net profit. That's why the net profit is improving more. Obviously, we still mention some of the forecast risks and opportunities. Availability of generation facilities is always something that we mentioned. Also, the realization prices, although we are now almost fully hedged. So that's a limited impact. We obviously are still a little bit in the dark on the shape of recovery or the shape of the business activity resulting from COVID-19. We are more pessimistic in Q1. So that's why we are now improving the outlook, but we still don't see now if we are too optimistic or still -- I'm not optimistic enough on how it will continue from now on. And then we have again one of the really good years in commodity trading, and we hope that it will get even better, but it's one of those kind of recent opportunities for the outlook. And that's all on the presentation side. So the next page shows the expected year-on-year change by segment, but I think it's pretty self-explanatory. And with this, we will be ready for the questions.

[Operator Instructions] And we’ve received the first question. It is from Elchin Mammadov of Bloomberg Intelligence.

Elchin Mammadov from Bloomberg Intelligence. I have 3, please. So the first one is on the nuclear. I just wanted to clarify 2 things. So obviously, the deals haven't been finalized, et cetera, but who holds the risk of project delays and cost overruns? Is it the CEZ or the government? And a follow-up question on nuclear, what is the strike price range? If you can share that, that will be great. The second question is on distribution. You had a very useful slide explaining how the new regulation works. What I wanted to get an understanding of what the RAB growth is going to be like in 2020, 2025, especially taking into account increased recognition of RAB that you talked about? And finally, just wanted to quickly find out about the updated time line for completions of disposals in Eastern Europe. From what I wrote last time, Bulgaria should be done in 2020, while Romania, Polish disposals in 2021, and Turkey, we don't know when. Is that still the case? Or has anything changed?

Okay. On the nuclear, it's -- at this moment, we have a contract for the first phase. So I'll explain some of the approaches to the first phase because it gives you a good idea of how we would then approach also the next phases. It is obviously the role of CEZ to complete the project on time, on budget. At the same time, the contract lists a number of reasons where the -- where CEZ may ask for an increased budget or increased time line, and then kind of this cost and the time line will be incorporated in the contract. And in case -- for example, in the case, in case of sale of the company at the end of that phase, then it will be -- CEZ will be reimbursed for those. And the list is pretty long. It includes changes in rules, regulations. It also -- some of the deadlines on the side of the governmental offices, which should grant different authorizations and permissions. So if those are not met, and again, it's a reason to either increase the budget or increase the time line. So this would be the general approach. So again, it is our role to do it properly. At the same time, if there are reasons from outside of CEZ's control, that will drive the project either at budget or time lines. For the future contracts that we will only sign, I foresee also a list of kind of reasons where we ask for the budget increase or time line increase. Now on the strike price, there are obviously -- the strike price is mostly linked to 2 things. One is the cost of financing, and the second is obviously the cost of the investment. The cost of the investment, we are currently using for overnight costs at the level of the benchmark of EUR 5,000 per kilowatt and we'll see only the final cost when we have the binding bids from the tendering procedure. On the financing, we have been using mostly a big range. It can be anywhere -- anything between 4%, 5% up to 10%. And then it drives then the strike price from anywhere between EUR 50 and EUR 100 plus. Now with the government's intention to provide financing at around 2% and 0% for the period of construction. So 0% for construction and once it's contracted, around 2%. Then this obviously pushes the financing costs down with the -- also, I didn't mention that for these calculations, the target [ equity EBIT ] ratio was 30% to 70%, so 70% debt. And then this drives the expected strike to the lower end. So EUR 50 to EUR 60, sometimes EUR 50 to EUR 70, depending on the details. But at this price -- this [ struck ], obviously, at 2020 price level. Then the power plant should be cost competitive, price competitive to other technologies that are available to the country on its pursuit to achieve 0 carbon emissions. So distribution. When we look at actually the slide on the distribution, which is on Slide 8, and if we calculate actually the level of RAB. And so today, CZK 106 billion or CZK 107 billion is 82%. So this is something like CZK 129 billion, I think 100%. And we will be growing steadily to reach this base by 2025. In 2021, we will move from 82% to 89%. Next year 95%, then 97%, 98% and finally, 100% in 2025. So very simply said, making a few calculations, you can come to a conclusion that basically, what we lost on lower WACC, we are gaining basically on a RAB multiplied by -- on the RAB that we were not entitled to multiply by 6.54%, which is definitely good news. Then disposals. Bulgaria, we will see -- actually, yesterday, there was the end of 14-day deadline when Bulgaria Antimonopoly Office could appeal against the decision of the court to the highest court, actually, or Supreme Court in Bulgaria. We don't know -- we don't have information whether they did it or not. As far as yesterday or today, we did not get information that they did. So should they not actually appeal, they need to decide in a matter of our sale of assets to Eurohold once again within given deadline. So hopefully, this is the case. And if this is the case, then I think we could definitely finish the transaction by the end of this year. Romania, we have a few high-quality offers, have an exclusivity with the best offer now for a few weeks. If those things materialize, I would suggest that by the end of the year, we should close the transaction and then, of course, go through the, again, regulatory approvals and finish the transaction next year. Poland, we were ready to start disposal process of 2 Polish plants earlier, actually in the second quarter but due to COVID situation, we decided to postpone it, and we will start during second half of this year. And yes, Turkey, as you mentioned, Turkey is an ongoing process where we really don't have any credible interested parties. So this is kind of continuous discussions with mainly local players or players from the region, but nothing has really materialized. So [indiscernible].

The next question is from Wanda Serwinowska of Credit Suisse.

A couple of questions from me, if I may. Can you -- I don't know if I missed it, but can you talk about the one-off CZK 1.5 billion that you are going to report this year? Is it tax free? Or is there any taxation on that? The second one, would you be able to disclose what was the profit of the trading business in H1 comparing to H1 last year, so we kind of got the flavor how much you gained there versus last year? Also, would you be able to disclose the price that you received for the wind asset in Poland? And finally, sorry for breaking the 2-question rule. On the new nuclear, you mentioned that you can kind of hedge yourselves against the increasing cost, but would you be able to list a full list of raisers causing the cost of nuclear going up? Because when we look at the new nuclear projects in Europe these days, all of them are delayed and all -- and the costs are a few times higher than the original plan?

So the first one, CZK 1.5 billion, this is actually why we improved our guidance on net income relatively more significantly than we did actually on EBITDA. And exactly CZK 1.5 billion is the reason, which is an interest to be received fairly soon. So it will be booked in the third quarter, but it's already put into guidance. What it is actually, in 2018 and -- 2011 and '12, Czech government imposed so-called gift tax on 3 carbon credits that we were getting. Of course, we appealed at the court, we won the court. And a few years ago, we got the tax back. We also wrote CZK 700 million of interest, but we actually claim that we should receive another CZK 1.5 billion because the government paid the interest only from the date between the court decision and when we got the money actually from them, and we basically appeal that we should get it from the day 1 when we paid the tax. And after a few years, we actually won the court case in the last instance. So we expect to receive the money fairly soon. So this is CZK 1.5 billion that is coming into net income. It's tax free because it's an interest for -- from the government for the year -- for the originally -- original decision. Then wind price in Poland, I don't think we actually disclosed it or at least I don't have it here, and I'm not sure whether we do disclose it, probably not. But it's nothing significant. We are not selling the plants that are up and running, but we are really selling the projects under development and a few pieces of land. Then profit trading, really don't have the exact comparison here, but it's fairly similar actually. No. So no details right here. And then new nuclear.

New nuclear. I'll just comment on the new nuclear. Look, at this moment, we have the contract negotiated for Phase 1, which is the phase, as I described, obtaining the siting permit and running the -- there, the contract has been published. It's actually placed in the contract registry. Obviously, it's only in Czech, but it's -- you can see there the list probably has about 10 items. And again, I guess, if you call Barbara Seidlová, you can go through the list. Obviously, the list for the actual construction will need to be developed, but I just wanted to use this as to give you a hint or idea of how we approach the negotiation. Now I understand that the first 3 units for various reasons are not -- in Europe are not going well. We studied the reasons. We worked hard to set up the organization and so forth to avoid those. Some of the reasons are the kind of the teething pains of the new nuclear wave after more than 20 years of developing. And a number of these projects are being developed by EDF -- or currently by EDF, taking over AREVA. Now EDF announced that for the next wave of nuclear power plants, their target price is around exactly EUR 5,000 per kilowatt and EUR 60 per megawatt hour. And for example, on their side, they worked on simplifying a -- the design as such of the nuclear reactor as well as developing or closing the [indiscernible] white spots in the supply chain. And a similar situation is also with other nuclear providers. So I think nuclear is seen as an important technology for achieving the zero-emission targets, both in Europe and also elsewhere in the world. Yes, the first project did not go or not going exactly well. At the same time, it is not seen as a dead-end technology. It's a technology that is being developed further together with the supply chain. So we need to learn as much as we can from those and achieve better results on the project.

The next question is from Arthur Sitbon of Morgan Stanley.

I have perhaps 3. The first one is actually -- sorry, it's a follow up on new nuclear. You were mentioning this strike price of potentially EUR 50 to EUR 70 per megawatt hour. I was wondering what are the assumptions in terms of the construction risk you would transfer to the contractor of the project rather than the sharing of risk with the government. So that's one. My second question is I think there are discussions on a potential retroactive cut of the return on your solar projects in the Czech Republic. I was wondering if you could give an update on that front. And the last one is in the Q1 '20 presentation, you were talking about an impact of COVID for 2020 EBITDA of CZK 3 billion to CZK 4 billion, and you were dividing that between traditional energy and mining and distribution and sales. I was wondering if you could update that sensitivity and give the granularity again for the various divisions. It will be very helpful.

Okay. On the EUR 50 to EUR 70 strike price and the kind of risk transfer assumptions, there are, at this moment, no explicit detailed assumptions on the risk transfer. As I said, we work with the assumption of EUR 5,000 per kilowatt investment cost. We work with the assumption of 30% equity, 70% debt. And we work with the assumption of those 70% of the debt provided by the government. Now when you say 30% to 70%, it's 70% average level of debt throughout the construction and operations. So it's like the average kind of WACC or structure of financing for the whole project. I think it will -- then when we -- that will be basically a 3-party negotiation in a way because at the same time, we will need to negotiate with the supplier. We will need to negotiate with the government, with the supplier -- the supply contract with the government, the offtake contract and also the financing contract. And all these will need to kind of work together so the risks are shared in the most appropriate way to the party that can control the risks. And depending on where the risks are, then it will be either factored in the CapEx, in the cost we pay for the power plant and also in the offtake price. So that's why we -- at this moment, we use very wide ranges. And we will only know more precisely about this towards the end of Phase 1, around end of 2022 to year 2023. So now actually, solar projects, yes, government is actually thinking of imposing cap on profitability of solar projects in the Czech Republic. It would not be retroactive, but it would be actually going in the future looking forward. And it's still not done. And so it's under discussion. And the impact would not be significantly material because our level of profitability is above what they actually suggest, but not terribly above. So there might be some impact, especially if you look at how much we are already made in the past, if they were trying to spread the reduction for the future, taking into consideration the past result, there could be some impact, but it's too early to comment. We will really wait for what crystallizes out of the discussion. There is definitely a very strong push against this type of idea. Then COVID-19, yes, after first quarter, we reported CZK 3 billion to CZK 4 billion potential impact. Now we actually estimate it at CZK 3 billion. The structure is CZK 1 billion to CZK 1.5 billion is actually power generation and mining. Power generation mainly due to a decrease of spot prices where we had to sell electricity that we originally reserved for our big customers who didn't take it due to shutdown of their factories. And mining is impacted as a function of lower power generation. Remaining CZK 1.5 billion is coming from sales and distribution, sales and ESCO business is about CZK 1 billion and distribution probably about CZK 0.5 billion. So now actually, we reduced an expectation of negative impact by CZK 1 billion. And partly, you can see that actually, this is by how much we increased our EBITDA expectation. So we moved it from CZK 61 billion to CZK 62 billion to CZK 64 billion.

The next question is from Piotr Dzieciolowski of Citibank.

I have a couple of questions. The first one would be regarding your balance sheet in light of nuclear project. And at what point do you feel there will be a need to improve the balance sheet structure ahead of the project? Would then -- how do you feel comfortable running 3x net debt EBITDA in the middle of the decade, having all of this CapEx outlay? So we kind of have a bit of a better understanding how we should look at your balance sheet in -- assuming this project goes ahead, at what point you have to be at kind of what bracket? And then how this balance sheet preparation may actually affect your dividend policy? If you can shed your light on this. And second question was more relating to the Just Transition Fund. I wanted to ask you, what is your understanding of what the money can be directed to? Is it just renewable growth or that something was called early decommission mechanism? Is this also within this Just Transition Fund and could be eligible?

Okay. So on the balance sheet. Look, I can also... Sorry.

No. Let's start with these 2 questions. I think that's more than enough.

Yes. Okay. On the balance sheet, one thing I didn't mention that the government financing, the loan for the project construction will be a project-based financing. So it will be directed to the Dukovany II SPV. At least this is the intention. So what would directly impact the balance sheet of the rest of the CEZ Group would be only the equity part, which is kind of in the order of magnitude of kind EUR 1 billion to EUR 1.5 billion. So from this perspective, we don't see immediate impact on the balance sheet nor do we see an immediate impact on the dividend policy stemming from the nuclear. Also what needs to be said is that the actual construction only starts after 2029. The most of the capital outlays come only after 2030. And again, the idea is that our equity financing could be used for the Phase 1 and for Phase 2. As I said, roughly the order of magnitude 1 -- a little bit over EUR 1 billion. And then the actual construction then would be financed from the government loan that would be project-based financial.

And it's important to say -- so the following 10 years, basically no impact on the dividend and also balance sheet. And then we always have a put option at the end of each milestone. I think the project would not be economic or put change for whatever reasons. Regulatory, we wouldn't be able to put the project on the government, including the debt that is actually associated to it provided by the government. So for following, now 10 years, it's not really an issue. And then, of course, we will see also bigger details. Just Transition Fund -- well, we did -- we had some interruptions in our questions. Sorry, we didn't really understand fully. The Just Transition Fund in general is directed for the regions more impacted by the coal decommissioning, which is the Northern Bohemia here -- Western Bohemia, Northern Moravia. And then within that, we understand it's eligible pretty much anything, so definitely, energy savings, renewables, and other projects.

Okay. Is there any pot of money you can get for early decommissioning of the coal capacity? So if you go to [indiscernible] or approved within the [ yield ] that can be directed at the earlier coal closures?

No. It can be -- no. Simply said, no. Obviously, we'll see what comes from the coal commission as such. But the -- what is not decommissioning is -- I mean what is not eligible is decommissioning. What we expect to be eligible, it's -- for example, transitioning, heating stations from coal to gas. So I don't know if you want to call it the decommissioning, but the decommissioning part is a no. But new technology developing, which will come instead of the current coal station for heating stations, yes.

Okay. I understand. And maybe the last very short question, if I may. It's on the distribution part of the regulatory review, which we just received. The kind of the trajectory part of converging to the full RAB. Can you quantify, once you reach this, how much was -- is this just a mathematical impact of the value of the growth RAB times the WACC and that is how you get the EBIT uplift? Or is there any kind of outperformance you can get on this RAB or all of the operations [ aren't touched ], it's just purely mathematical function of adding RAB times WACC and a bit of depreciation?

Yes. That's still really mathematical. The year-over-year in RAB is basically a function of net CapEx, plus the revaluation, yes. And the -- yes, and the revaluation is already based on the mathematical formula. So we know whether RAB would be -- what the revaluation of RAB would be in every single year. And the growth in RAB will obviously be depending on the CapEx we spend -- we plan to spend. Yes. But it's a clear trajectory.

The next question is from Bram Buring of Wood.

This is Bram Buring from Wood. 2 questions, please. First, follow-up on the offtake price. So as we get to the end of June 2024 where there's a [indiscernible] agreement on the offtake price on the new nuclear plant. Have you conceptually -- is this supposed to be a figure that will be carved in stone? Or will there be provisions for adjustments as we go through the phases? That's the first question. The second one is, well, CEZ's -- your CEO was [ quoted ] in the local press, saying that CEZ may consider tendering for the new 5G license, become the new fourth operator on the market here. In view of the publication of the tender contracts from the spectrum that was published into last week, have you got any sort of new thoughts on what you're thinking about entering -- potentially entering the mobile market? And what would be the various key points that we should keep in mind to figure out whether you may or may not.

Okay. On the strike price, I think I would expect that the approach would be similar to what you find in the contract that we have for the Phase 1. So there is a price -- a budget, which then translates into strike price carved into the stone, as you put it. At the same time, there will be a number of adjustment mechanisms. Some of them based on the budget adjustment driven by the allowed reasons for adjustment as they are in the contract now. On the -- specifically on the offtake, I would also expect apart from legislation, approvals, process, regulatory requirements, technology requirements and so forth. Also, the financing, depending on how exactly the loan will be structured with the government, if it's obviously fixed interest rate, then it would not change the strike price. If it would be a floating interest rate to some degree or linked to something, then the strike price would need to be also adjusted based on the floating of the interest rate. So I'm sure there will be a long list of adjustment clauses in the contract that would then, with kind of the initial strike price -- how the initial strike price would be adjusted. One of them also would be the fact that the strike price is typically for the new nuclear given the length of the project quoted in the prices of the year of the signature, and then it's inflated by the agreed set of inflation prices [ for that ]. But this is all to be agreed and I think it will not take weeks but rather months or years to develop such project that covers all the risks that need to be covered from the perspective of CEZ's shareholders.

Regarding 5G, we are analyzing a document that was published last Friday, and definitely, I cannot provide any comment. Just not giving anybody hints on what our thoughts are. So...

There are no further questions at this time. I would like to hand back to you.

Okay. So thank you, everyone, for taking part in today's call. As always, IR team is available if some follow-ups come to your mind. Thank you and goodbye.

Thank you. Goodbye.

Thank you.

Ladies and gentlemen, thank you for your attendance. This call has been concluded. You may disconnect.