Despite the unfavorable market prices and an uncertain expenditure forecast, Czech Republic wants to build two nuclear reactors. Even if the cost will involve selling one of the family jewels, the energetic giant ČEZ

The Czechs do not give up their passion for nuclear power. Sixty percent of the Czechs continue to support atomic energy. This is unlike Germany where the Fukushima catastrophe led Angela Merkel – the political chameleon always ready to cater to the voters’ inclinations – to the decision to shut down nuclear power plants and to adopt EnergieWende, a mix of coal, gas and renewable energy. The support is even stronger among local politicians and energy experts that see in the atom as “the only source of safe, low-cost and emission free energy”. This vision was acknowledged by the 2015 State Energy Policy, which anticipates a mostly nuclear energy mix and the construction of two new reactors within the two power plants of Dukovany and Temelín.

The unsustainability of nuclear power

During the last few years, the atom supporters have been facing a far more insidious opponent in some ways than the environmental activists and the movements against nuclear power. For almost a decade now, the energy prices have been too low to justify a nuclear investment, which has low costs of production but huge initial investment. The profitability of the investment was precisely the question that led to the failure of the tender for the construction of two new reactors, launched in 2013 by the company České Energetické Závody (Czech Energy Plants), widely known as ČEZ. “The price levels endanger almost any investment, which should be based only on market parameters”, complained in 2014, Daniel Beneš, the CEO of the largest Czech energy company (and the second company in the country). The prices have not risen ever since and should not do so even in the future, according to analysts, at a level that would make the project economically viable.

The lack of market sustainability for the reactors construction rises a major challenge to ČEZ, which is a state majority owned company listed on the stock market. The minority shareholders are firmly opposing the company’s commitment to a project, which would drain the increasingly thinner profits. In 2009, the company had a net profit of 52 billion crowns, which in 2016 decreased to just over 19 billion crowns. Under these conditions, the company would not be able to finance on its own the nuclear investment estimated to be at least 200 billion crowns. Moreover, the shareholders are opposing the possibility that the company will finance the nuclear project by itself, as the cost and time frames for new reactors in Europe are practically mind blowing. An unsettling example is the case of the Slovak power plant in Mochovce, whose completion has been extremely delayed. In the Slovak case, the Enel executives and technicians, which are the majority shareholders of Slovenské Elektrárne, have been accused of incompetence. Nevertheless, delays and budget overruns have also occurred on construction sites where there is no trace of Italian nuclear-free engineers, such as Olkiluoto in Finland and Hinkley Point C in the UK. Eventually, even the Czech projects have been facing troubles. Concluded in 2000, the construction of the two reactors of Temelín, financed by ČEZ using bank loans, recorded increases and delays due to the tensions with Austria that firmly opposed the new power plant.

How to deal with the minority shareholders?

Given all these precedents, even the most atom-supportive politicians exclude the possibility that the state could directly finance, through a special company created ad hoc, the construction of new reactors, which should arise close to the existing plant of Dukovany. Starting September 2017, as a follow-up of a Reuters report, the possible spin-off of the company is mentioned to an even greater extent. This would result in a newco that would continue to be listed on the stock market and which would have in its portfolio the most valuable assets in the eyes of the investors, such as renewable energy and distribution. The parent company would keep the dirty energy projects and other less attractive activities. From a corporate point of view, the newco would be gradually privatized and the state participation would decrease from 70 to 25 percent, while the parent company would remain entirely state-owned and would be responsible for conducting the nuclear sector expansion project.

The ČEZ management is strongly in favor of the corporate spin-off, which, once completed, would represent the largest financial transaction of the decade.  “The best evaluated option is that of the transformation of the company”, mentioned ČEZ in a presentation at the beginning of February, for Committee on Economic Affaires of the Chamber of Deputies. In the presentation, the company promised that the spin-off would increase the group’s value by 65 billion crowns.

The increasing orientation towards the split did not seem to please Prime Minister Andrej Babiš, who did not hide his discontentment towards the management of the power plant. Few days after the presentation took place, the premier announced the formation of an expert commission that would evaluate the management’s hypothesis. The government will be having the final word.

The minority shareholders remain bystanders for now, having a lot to gain from the division. If the newco would come to worth on the market more that the current company, the shareholders would accomplish an outperformance and all the resources paid by the state for the shares purchase in the former company would add to it. Thus, the involvement in the matter of Michal Šnobr, consultant of J&T investment bank, was no coincidence. He increased his own share with over one percent of the capital, becoming an accredited investor. Along with other minority shareholders, Šnobr complains about the management’s lack of transparency. “Our main motivation (to become accredited shareholders, Ed.) is the spin-off, we want more information, which obviously other shareholders possess and the minority ones do not”, declared Šnobr. The main objective is to convene an extraordinary general meeting and put pressure on the management that according to the private investors is too accommodating towards the majority shareholders. The minority shareholders know that they represent the main cause of the financial transaction. The objective is not only or mainly the financing of new reactors but that of removing the private investors from the company with a less financial expenditure than the buyback of their shares at the current values.

The end of Čezká Republika?

The spin-off of the second largest Czech company would not only mean a record privatization but also an important political step. Starting the early 2000, the company has been extraordinarily influencing the political class, which went (and is going still) beyond the energy sector. Highly passionate critics of ČEZ, the environmental activists have even renamed the country using a play of words Čezká Republika to emphasize how the company has been controlling the government and not the other way around.

With the spin-off, the company would lose its “national champion” status and would be one of the many important players in the Czech energy sector. The progressive weakening of the traditional parties decreased as well the influence of ČEZ. Thus, the main benefit would be the ending of an alternative power hub, which Andrej Babiš would gain from this financial operation that will surely speak for itself in the months to come.

by Jakub Horňáček