A Billionaire Prime Minister’s Nuclear Dream Is Spooking CEZ Investors

(Bloomberg) -- Billionaire Prime Minister Andrej Babis’s ambition to build new nuclear reactors in the Czech Republic is denting CEZ AS’s shares well in advance of any deal actually being struck.

That’s particularly unfortunate for the investors in eastern Europe’s biggest publicly traded power company, who should under normal circumstances be benefiting from a rally in electricity prices to near a seven-year high. But CEZ is lagging peers because politicians keep dragging their feet about deciding who’ll pick up the multibillion-dollar bill for new reactors that would be unprofitable even at today’s prices.

A Billionaire Prime Minister’s Nuclear Dream Is Spooking CEZ Investors

This protracted saga is yet another example of how nuclear energy once seen as the main low-carbon alternative to fossil fuels is struggling to get off the ground because of mounting costs. Only last week, Japanese conglomerate Hitachi Ltd. took a $2.8 billion charge after scrapping a U.K. project even though the U.K. government put its most generous offer yet on the table to help fund the Wylfa plant in Wales.

Babis’s administration missed its own end-2018 deadline for a decision on how new reactors should be funded. What’s making investors turn their back on CEZ are the repeated statements by Babis and some of his ministers that the state-controlled utility should foot the bill, despite warnings from the management board and shareholders that such a move would trigger lawsuits from investors who hold the remaining 30 percent.

A Billionaire Prime Minister’s Nuclear Dream Is Spooking CEZ Investors

“The stock price could be much higher if politicians didn’t constantly agonize investors with this idea,” said Miroslav Frayer, an analyst at Komercni Banka AS, who recommends buying CEZ with a target price 14 percent above the current market level. “We believe in the end the government won’t be able to force CEZ into what would amount to intentional mismanagement. The odds are very low but the stakes very high, and for some investors this is unnerving.”

Soviet Reactors

Czech governments have long considered replacing the nation’s old Soviet-designed reactors with new units as crucial for the country’s energy security. The nuclear push should also help to phase out coal-burning plants and curb carbon emissions. The problem is that despite the rally, power prices remain too low to make such investments commercially viable without hefty state support, which politicians are refusing to provide.

The unfavorable math forced CEZ to cancel a tender for new reactors in 2014, after years of price negotiations and legal disputes with potential suppliers.

With the cost of renewable technologies plummeting, making wind and solar plants even more attractive to nations phasing out fossil fuels, the surge in costs from contracts to completion for new nuclear plants in Finland and France is evidence of how the technology is falling behind competitors.

Still, Babis argues that CEZ can afford to build at least one unit at its older Dukovany station, with the government acting as a loan guarantor. The management says that only a fully state-owned entity can fund the investment, estimating the cost of one reactor at at least 150 billion koruna ($6.7 billion), or more than half of CEZ’s market capitalization.

Last May, then-Industry and Trade Minister Tomas Huner scared investors by suggesting that CEZ could cut its dividends to fund the project. Since then, the stock has lost about 7 percent, even as Europe’s benchmark electricity price has jumped 20 percent. Other European generators have benefited from rebounding power market, with Electricite de France SA gaining more than 15 percent and Austria’s Verbund AG surging more than 55 percent in the period.

Temporary Relief

Huner’s successor Marta Novakova gave CEZ investors a temporary relief in October by saying the government could delay construction of new reactors. But market sentiment soured again less than a month later when she said the company is profitable enough to be the primary investor.

And now, the uncertainty for the shareholders is likely to drag on.

About a week past the end-year deadline for the financing decision, Babis revamped his team of nuclear energy advisers. The government will also invite representatives of all parliamentary parties to joins the discussions about the best investment model and a “debate about the timetable will follow,” Industry and Trade Ministry spokesman Milan Repka said Tuesday.

Czech parliament is hosting a conference about the future of atomic energy on Feb. 21, with the main speakers being Babis, his ministers of industry and finance, as well as the chiefs of CEZ and the nuclear-safety regulator. Part of the event will be presentations by the six potential suppliers of new reactors, including CGN, Areva, Atmea, Westinghouse, Kepco/KHNP, and Rosatom.

“The government keeps kicking this can down the road,” said Bohumil Trampota, an analyst at J&T Banka AS in Prague, which owns CEZ shares. “I expect them to commission more analysis that will eventually confirm it’s impossible to force CEZ to do this without the project being immediately derailed by lawsuits.”

How the Czech nuclear story has unfolded:

2009
  • CEZ starts nuclear tender.
2012
  • Areva excluded from tender.
2013
  • CEZ calls on remaining bidders Rosatom and Westinghouse to improve their offers.
2014
  • CEZ cancels $15 billion tender for 2 new reactors after government refuses to provide price guarantees.
2015
  • CEZ says it will probably announce a new tender in 2016-2017, but the government must provide price guarantees.
2016
  • Rosatom, Westinghouse, Atmea, Korea Hydro & Nuclear Power, EDF and CGN show preliminary interest. 
  • Then Finance Minister Babis, a staunch opponent of price guarantees for new reactors, tries but fails to remove CEO Daniel Benes.
2018
  • March: Industry and Trade Minister Tomas Huner says the Czech state may buy out a part of CEZ that would build reactors, the government’s nuclear-energy committee will make a final recommendation on financing in May.
  • May: Huner says nuclear committee will make a final recommendation in November, options include reducing CEZ dividend.
  • August: CEZ CFO Martin Novak warns of potential lawsuits from minority shareholders, says only a wholly state-owned entity can build new reactors.
  • October: Industry and Trade Minister Marta Novakova says government may postpone decision on new reactors and extend the lifespan of aging reactors instead to avoid “potential court disputes.”
  • November: Novakova says CEZ is profitable enough to be the primary investor in new reactors. Babis proposes state could act as a guarantor of loans. Nuclear committee misses deadline for final recommendation.
  • December: Government misses deadline for final decision.
2019
  • Babis announces overhaul of nuclear committee, replaces main atomic-project coordinator Jan Stuller with former CEZ CEO Jaroslav Mil, invites input from all parliamentary parties.

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