East Europe's Power Champion Offers Spinoff to Fund Reactors

(Bloomberg) -- CEZ AS, the largest power utility in the European Union’s ex-communist East, favors spinning off its clean-energy assets to finance the construction of new nuclear reactors.

Splitting the company was the option preferred by Prague-based CEZ as its executives outlined three scenarios to Czech lawmakers on Wednesday, according to a document seen by Bloomberg. The plan would create a fully state-owned company with nuclear and coal generation, mining and trading assets. A separate entity would have clean-energy and distribution.

The move would split the Czech power company along similar lines to the division of RWE AG in Germany in 2016, which created Innogy SE to hold its green power, grid and retail units. CEZ needs cash to finance expanding its nuclear program and replace aging coal plants and and Soviet-era reactors. While a succession of governments has urged construction of new atomic plants, none has provided guarantees that would make the project profitable.

Under the plan, the state would buy minority shareholders out of the fossil-fuel assets and sell a stake in the newly formed clean-energy company in an initial public offering, according to a person with direct knowledge of the plan.

“If the split and IPO are really carried out, it will be a very interesting story for investors,” J&T Banka AS analyst Bohumil Trampota said in a note. “On the assumption that CEZ is split into two companies, one of which is fully owned by the government, we will additionally expect a premium to our price for the buyout of minorities.”

The state would initially hold 51 percent and could later reduce its stake to 25 percent. The utility, in which the government owns almost 70 percent, confirmed the meeting took place but declined to disclose details of the plan.

CEZ shares rose as much as 1.7 percent, most since Jan. 5, before trading up 1.3 percent at 528 koruna by 9:51 a.m. in Prague. The stock has gained 6.3 percent since the beginning of the year.

CEZ said in the presentation that the spinoff could “remove a discount” on its shares and boost the company’s value by up to 65 billion koruna. The utility canceled a $15 billion tender for a new reactor in 2014 after power prices slumped by almost two-thirds from the levels in 2008, when the decision to build was made.

Other possibilities to fund the expansion include setting up a new, fully state-owned company or creating a unit 100 percent-owned by CEZ, according to the document. Lawmakers will study the proposed scenarios and are scheduled to make their recommendations to the government at the end of March.

Prime Minister Andrej Babis had said in the past that the utility is in good-enough shape to finance at least one nuclear reactor without outside investors or state aid. CEZ managers warned such a solution would devalue the company and harm small shareholders.

“There is no nuclear reactor under construction anywhere in the world that’s being built without some form of state intervention,” Chief Executive Officer Daniel Benes told journalists after CEZ presented its study to lawmakers at the Dukovany nuclear power station about 200 kilometers (124 miles) south-east of Prague. “The scenarios are being analyzed now. I will only give my opinion on which one I considered best at the end of March.”

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