Investing.com -- Moody’s Ratings today affirmed the Baa1 senior unsecured debt rating of CEZ, a.s. (CEZ) and its baa2 Baseline Credit Assessment (BCA), while improving the outlook from negative to positive.

The change follows the Czech Government’s acquisition of an 80% stake in EDU II, a vehicle previously fully owned by CEZ and set up to manage the construction of two new nuclear plants in the country. The share transfer took place on May 5. CEZ is expected to recover around CZK3.6 billion in 2026, representing 80% of project development costs incurred so far, for its equity share.

CEZ also reported in its first quarter results on May 16 that it will no longer face any contingent liabilities related to these nuclear projects. The company will maintain a 20% ownership in EDU II, but its role in the construction of the two reactors will be limited to advisory and other services under service contracts.

The Czech utility company’s rating affirmation is due to the significant reduction in potential exposure to new nuclear plant construction in its business profile. Moody’s noted that CEZ will continue to focus on its regulated network activities and power generation from existing lignite and nuclear plants, and invest in new renewable and gas-fired generation.

The positive outlook on CEZ is a reflection of the removal of most construction and commissioning risks associated with the EDU II plants. This change evidences the Government’s ongoing focus on CEZ’s financial profile, and its policy to position CEZ to manage the energy transition and related investment in the Czech Republic.

Over the next few years, CEZ plans to invest in a combination of capital expenditures for its distribution network and incremental renewable and gas capacity. The pace of these investments is expected to be slower than previously anticipated, allowing CEZ to integrate last year’s acquisition of GasNet, s.r.o. without weakening its credit metrics below the threshold set for maintaining the current rating.

The Baa1 rating and baa2 BCA of CEZ continue to reflect its leading position in the Czech electricity market and well-balanced vertical integration. The low-cost nature of its nuclear and lignite power generation fleet and the relatively stable and predictable cash flow generated by its electricity and gas distribution activities in the Czech Republic are also factors.

However, these positives are offset by CEZ’s relatively high exposure to merchant power generation, limited geographical diversification, exposure to decarbonization policies due to its centralized and carbon-intensive power generation, and risks associated with its large investment plan.

The ratings could be upgraded if CEZ successfully executes its long-term strategy while preserving balance sheet strength. Upward pressure could also occur if the upcoming election in the Czech Republic does not result in a reversal of CEZ’s materially reduced risk exposure related to new nuclear construction.

Conversely, a downgrade could occur if CEZ fails to maintain a financial profile commensurate with Moody’s guidance for FFO/net debt and RCF/net debt, or if CEZ becomes involved in the development of new nuclear projects in the Czech Republic to an extent that exposes the company to potential construction risks.

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