CEE Equity Research

On Bloomberg: CCSR
10 September 2014
Electricity Rating: Overweight

CEZ Target price (eoy): CZK 700 (prev. 680)

Earnings Revision Price: CZK 626

We have set up a new model to investigate CEZs fair
value, which reflects the new market condition more Bloomberg code CEZ CP
properly and also echo our view about the currently Reuters code CEZPsp.PR
visible horizon.
Market capitalization CZK 336 billion
As it was reported before, CEZ is facing short term
EUR 12.1 billion
difficulties due to low commodity prices, but we expect
that these hardships reached the bottom and will be 52-week range CZK 458-631
slightly favourable in the next few years. We continue to Av. daily turnover (12 m) CZK 271 million
believe, that the main potential catalysts are rising EUR 9.9 million
electricity price, which should be driven by a tighter
Shares outstanding 537.9 million
market reflecting capacity closures, and/or a significant
increase in nuclear generation which is most likely Free float 30%
possible with the acquisitions of Slovensk Eletrrne. EURCZK exchange rate 27.7
In H1 2014 CEZ maintained its full-year guidance for
EBITDA, expected at CZK 70.5 billion vs CZK 81.9 billion
in the previous year, in line with Concordes forecast at
CZK 71 billion. On the other hand CEZ changed its
expectation on the subject of net profit, modifying it
upward by 5.5% at the level of CZK 29.0 billion vs CZK
35.2 billion in 2013. On the whole, the company still
projects a 14% yearly EBITDA decline and 17.6% drop in
the case of net income.
Building up the new model, we identified the four most
important drivers which predict the revenue of the
company. Unsurprisingly, the amount of sold electricity,
the realized baseload price, and the exchange rate were
the dominant proxies in the generation segment.
Furthermore, we strongly assume that RAB growth is a
great proxy to forecast the revenue of the distribution.
Based on our valuation, we have found solid unpriced Analyst: Sales: Trade:
opportunities in the company which is willing to develop Daniel Tunkli Eva Kormendi, CFA Steve Simon
despite the gloomy electricity market environment. Thus, +361 489 2228 +36 1 489 2340 +36 1 489 2335
we maintain our positive long term view and give an d.tunkli@con.hu +36 1 489 2333 i.simon@con.hu
e.kormendi@con.hu
Overweight recommendation for 2014 end with a new TP
Peter Rimar
of CZK 700, which means a 12% upside.
+36 1 489 2230
HIGHLIGHTS p.rimar@con.hu
2013 2014F 2015F Gyorgy Sugar
EPS (CZK) 67.2 55.8 39.2 +36 1 489 2231
DPS (CZK) 40 32 23 gy.sugar@con.hu
P/E (x) 9.4 11.3 16.1
EV/EBITDA (x) 7.0 7.3 8.4 MAIN INDICATORS
Net debt/EBITDA (x) 2.4 2.5 2.9 2014F 2015F 2016F 2017F
Dividend yield (%) 6.3% 5.1% 3.6%
Electricity Sold [TWh] 55.37 55.59 55.81 56.04
Revenues (CZK b) 217.2 210.5 209.3
EBITDA (CZK b) 73.7 71.0 61.8 CZK/EUR 27.4 27.0 26.2 25.8
EBIT (CZK b) 44.4 36.7 25.6 Realized Baseload
[EUR/MWh] 44.5 39.5 38.0 39.0
Net income (CZK b) 35.8 29.7 20.9
RAB growth 0.7% 5.5% 4.4% 4.7%
Source: Concordes Forecast

Address: 50 Alkots Street, Budapest H-1123 Phone: +36 1 489 2200 Fax: +36 1 489 2201 www.concordesecurities.hu
 2

Strong pillars in a new model

We identified the four most important driver which mainly predict the revenue of the
company. Unsurprisingly, the realized baseload price, the amount of sold electricity,
and the exchange rate were the dominant proxies in the generation segment.
Furthermore we strongly assume that the growth of the RAB [Regulatory Asset Base]
is a great proxy to forecast the revenue of the distribution. Based on this, we have
found solid unpriced opportunities in the company, which is willing to develop,
despite gloomy electricity market environment.

Electricity price reached the lowest historical level of the last 5 years in March 2014
at the price 34 EUR/MWh. Thanks to CEZs successful hedging strategy, the
company sold energy over the average market price almost in every year since 2009
and there was a particularly great deal in 2013 when it has sold out all electricity with
more than 30% upside. We assume that the company has to adapt to the new
extremely low market price which means that the spread between the realized and
the average price will not be so high in the future than it was before. On the other
hand, we continue to believe that the company will find the way to hedge over the
average. CEZs usual practice is to hedge approximately 80-85% of the power till the
third month of the ongoing year, and hedge approximately 50% for the next, 20% for
the 2nd year, and 10% for the 3rd year. In the light of this practice, we identified that
82% of the power has sold at the price at 39.5 EUR/MWh for 2015, and 54% of the
amount of 2016 is sold at 36.5 EUR/MWh which delimits the companys
opportunities but gives a shield against the main potential risk of the business.

REALIZED AND AVERAGE BASELOAD PRICE [EUR/MWH]

Source: Bloomberg, CEZs reports. Concordes forecast

In general, there are five main predictor which are driving baseload price. We
identified the correlation between these drivers [Appendix 3] and it has brighten up
unsurprisingly that the correlation between coal and electricity price is robust at
0.704 but European gas price seems to be also a great component with the
correlation of 0.763. Last but not least, the relation between electricity price and CO2
allowance price is also significant but not as much as the other two were, it is
significant at 0.41. All in all, if we try to forecast electricity price with this bottom-up
method, it is beneficial to check the trend of coal and Europe gas. [Appendix 2]
 3

Currently, coal price is at the level of the coalmines break-even point with the price
of 80 USD/MT. CO2 allowance price had an extremely huge strike down from 18
EUR/MT to almost 3 EUR/MT. In the light of this the current CO2 price at 6.3
EUR/MT seems to be deeply cheap. Dutch gas price looks very stable since 2010,
with a few micro turbulence, at an average level of 24.6 EUR/MWh. We have to
highlight that in the current global political situation might have an impact to
Netherlands gas price. Strictly speaking, if Russian export stops, the European gas
price have to rise in the short term. In our view, this risk factor is not so relevant
temporary, because in case of rising gas price the market would switch to using the
coal plants hence the impact of high gas price will not be prevailed in the price of
electricity.

With the knowledge of these market trends, our forecast for realized baseload
electricity price is that the German baseload electricity price will be more or less flat
in the next years, and will rise roughly after 2017. In numbers, this means 38
EUR/MWh in 2016, 39 EUR/MWh in 2017, in 40 EUR/MWh in 2018. Bloombergs
forecast [Appendix 3] predicts lower baseload price on average than our forecast but
it also came to light that there might be periods, months where prices will be above
the average with a maximum between 38 and 41 EUR/MWh, thus we believe that
CEZs will catch these peaks in the future too like it did before.

We assume, that the amount of electricity sold will not be lower than 55.3 TWh but
will not exceed the level of 56 TWh in near future. This indicator is influenced by four
main factors, namely the weather of the country where the renewable power plants
have built up, the installed capacity, generation gross and the utilization. As it can be
seen in Appendix 2, the weather in 2014 was extremely warm, which accurately
means that there was not a month when the average temperature was below 0
degree. In general, this trend seems to be almost the same in Bulgaria and Romania,
the warmer winter, the lower electricity consumption, and lower level of production
from the renewable plants. We could not verify that there is a stronger than 0.2
correlation between historical average temperature and CEZs price or between the
average weather and the German baseload price, though one knows that there
should be a positive influence between the indicators.

UTILIZATION OF THE SOURCES [%]

Source: Bloomberg, Concordes forecast

 4

CEZ has one of the richest portfolio of energy sources in Europe which gives a great
opportunity to optimize the generation in those times when the electricity market
demand is low. This opportunity gives the chance to turn off temporary the gas or
coal power plants, meanwhile nuclear and the renewable sources meet the demand.
The total installed capacity of the company reached the level of 14.2 GW in 2009 and
grew by 6% at 15.1 GW till the end of 2013 1.[Appendix 4] In 2013, the portfolio mix
built up 35% Lignite, 28% Nuclear, 19% black coal and 18% renewable installed
capacity. Obviously, the efficiency of the sources are different, hence the generation
gross were 46% nuclear, 38% lignite, 8% black coal and only 8% of renewable.

The CAPEX program of the company which will end in 2017, have not focused on the
generation segment so much like it did before which means that the amount of
invested capital decreased from 65% (in 2009) to 44% (in 2013). In April 2014, CEZ
cancelled a tender for a $15 billion plan to build two new reactors at its Temelin
nuclear power station after the government refused to provide guarantees on power
purchase prices. Based on these informations, we forecast that there will not be
significant increase in the generation gross, utilization indicators in the near future in
normal conditions. The main chance to grow the capacity level notably is the M&A
opportunity of ENELs Slovakian stake.

Our current macro forecast for CZK/EUR exchange rate is between 25.8 and 27.4.

The distribution segment has a huge impact to the total revenue of CEZs therefore it
is an absolute necessity to find a great proxy to forecast this segment. We estimated
RAB growth to calculate the revenue of the distribution segment. In general, if the
CAPEX, which has spent to the distribution segment is growing quicker than the
depreciation the total amount of the RAB will growth therefore the allowed return will
grow as well. Due to CEZs CAPEX plan and our depreciation forecast we evaluated
a 0.7% RAB growth for 2014, which is a huge back step compared to earlier years,
mainly due to the lower CAPEX intensity. Subsequently, the RAB growth should
reach an optimal level of 4.3-5.5% on a yearly base.

RAB EVOLUTION [MILLION CZK]

Source: CEZs reports, Concordes forecast

1
Temelin ended outage of the first unit a few days ago. Thanks to modernisation, its output should be raised by 2 percent and
reach a record 1,078 MWe. Before the outage, the first units output was 1,056 MWe. Source: Bloomberg
 5

Valuation
Based on the key proxies above, our revenue forecast is CZK 210.5 billion for 2014
and CZK 209.2 in 2015, afterwards we forecast a greater growth in revenue, which
can be seen in the appendix. CEZs geographical revenue breakdown shows that
almost 80% of the revenue comes from the Czech Republic, 10% from Bulgaria
and and other 10% from the other countries where the company operates. The
main part of the revenue (66%) comes from the ditribution segment but the
distribution is only 29% of the total net income of the company. In contrast with
this, the component of the generation sector in the revenue is only 30% but almost
60% in the net income. In light of the earnings structure such as this, it is not
surprising why the company is so sensitive to the ups and downs of the power
price.

REVENUE BREAKDOWN OF SEGMENTS [MILLION CZK]

Source: CEZs reports, Concordes forecast

CEZ has a long-term competitive advantage of low and relatively stable generation
costs, mainly thanks to the two nuclear power plants and the coal power plants
which are using lignite from CEZs own mines. On the other hand, in the current
market condition, a company, which operates with mostly variable costs, for
example use only fuel based sources, benefits from the low carbon price and
achieve a greater spread than CEZ does. All in all, we point out to the same
conclusion, the higher electricity price the greater for CEZ. We forecast a 71 billion
EBITDA for 2014 which is almost line with CEZs EBITDA guidance at CZK 70.5
billion. Our net income forecast for 2014 is 29.7 billion roughly in line with the
guidance at CZK 29 billion. For 2015 we forecast CZK 61.8 billion EBITDA and a
CZK 20.9 billion net income but afterwards we prognose greater values.

We calculated risk free rate for the forecast period using the Czech forward curve
matrix to reflect the current low interest rate environments, and used the 10 year
government bond for the terminal period. Our cost of equity calculation is around 5
and 6% much above the cost of debt level at 1-2%. To sum up the discount factor
calculation, our WACC is between 3.7% and 4.2% for the examined period, and
4.7% to the terminal. We calculate with a 0.5% terminal growth rate due to our
growth vision of the company.
 6

Based on our valuation, we have found solid unpriced opportunities in the company
which is willing to develop despite the gloomy electricity market environment. Thus,
we maintain our positive long term view and give an Overweight recommendation for
2014 end with a new TP of CZK 700, which means a 12% upside.

Scenarios for sceptics

Mainly thanks to the generation segment, CEZ has to face with proxies which are
not influenceable but might be very volatile in turbulence market conditions. To
sum up the different scenarios, which the future might hold we evaluated several
sensitivity analysis which can be seen in Appendix 7. In the followings, we want to
highlight the most important scenarios. First and foremost, we think that the
volatility of the electricity price is the main risk for CEZs operation, therefore we
modelled a scenario when power price wander between 30 EUR/MWh, which
would be the historical low, and 60 EUR/MWh which was a normal price a couple
of years ago. As it can be seen in the table below, a huge downside in the power
price would halved the target price, but a little increase would lead to higher
impact. As it was reported earlier, our vision based more on the growth of the
produced amount rather than the surge in power price, but we have to establish
that CEZ is a risky asset due to the volatility of the electricity market.

TARGET PRICE SENSITIVITY: CZK/EUR VS. REALIZED BASELOAD PRICE

Realized baseload electricity price [EUR/MWh]

716 30 35 39 40 45 50 60
30 431 755 992 1078 1401 1724 2371
29 367 679 908 992 1304 1617 2241
CZK/EUR 28 302 604 825 905 1207 1509 2112
27 205 491 700 776 1062 1347 1918
26 173 453 658 733 1013 1293 1854
Source: Concordes forecast

The CZK/EUR exchange rate up or down also change the TP strongly. The
temporary price of 27.6 seems to be an optimistic price in our current macro view
and in the long term we calculated with a more conservative, pessimistic number of
25-27 CZK/EUR. We also made it visible in the Appendix how the target price
changes if the value of sold electricity grows, due to a new CAPEX program, or to
the two new reactors at Temelin nuclear power station which were postponed in
April.

TARGET PRICE SENSITIVITY: 10Y CZECH GOV. BOND VS. GROWTH RATE

Long-term growth rate

716 0% 0.5% 1% 1.5% 2% 2.5% 3%
0.5% 809 980 1211 1542 2056 2961 4983
1% 693 827 1002 1239 1582 2117 3072
10Y Czech
1.5% 593 700 835 1011 1251 1597 2138
goverment
bond 2% 522 611 722 862 1046 1299 1665
2.5% 457 532 623 736 880 1069 1329
3% 403 467 543 636 751 899 1093

Source: Concordes forecast

We believe it is also very important to see how the value of the asset will change if
the current low-interest market structure ends in the Czech Republic which of
 7

course influence the companys debt structure and the WACC level. With the
current long return of 1.5% the market priced an almost 0% growing potential in
the company. We believe this rate have to be more than 0.5% now and might
increase rapidly after the M&A.

M&A deal is standing in the door

Rome-based Enel Spal, announced in July 2014 that it will seek to sell its Eastern
European assets in a bid to reduce its debt by 4.4 billion euros. With regards of this,
the largest Italian utility is looking to sell its 66% stake in Slovensk Eletrrne (the
Slovak state owns the remaining 34%), which was bought in 2006 for EUR 840
million. CEZ and SE share geographic, political and cultural proximity which makes
the tie-up much easier. Not just the past but the present of the parties looks more or
less the same, because both of the companies operate several nuclear reactors also
need to replace aging atomic power units with new generators. Furthermore both of
them have a broad portfolio of renewable generators and fossil-fuel plants. In details,
SE has a 1.6 GW hydro capacity which is 60% of CEZs hydro capacity. It also has
1.9 GW nuclear capacity which is 45% of CEZs nuclear capacity. All in all, the
installed capacity should increase by 32% and the generation gross should rise by
30% due to the M&A. According to analysts estimates, the Slovak business could be
worth around EUR 2 billion.2

INSTALLED CAPACITY AND GENERATION GROSS WITH AND WITHOUT M&A

Source: Concordes forecast

On the other side of the deal, CEZ has held off on making major acquisitions in the
recent year mainly thank to the poor range of targets but also because of the gloomy
foreign investment history of the company. CEZ also canceled the tender of the two
new Temelin nuclear reactor which means in that case that the company spare
capital for the acquisition. The companys Net debt/Ebitda ratio is one of the lowest
in the segment at 2.4, which gives a great opportunity to finance a part of the
transaction from debt.

If the company finance a great part of the acquisition from its earnings the bid
might affect strongly CEZs ability to pay dividends, which is an important source of
income for the Czech state budget, and may concern Finance Ministry the major
shareholder of the company [Appendix 6].

All in all, SE is the perfect target for CEZ in every aspect, merger would make a great
amount of synergies. Now that there is greater clarity on the investment target the
one and only question the bid price which might destroy this idyllic growth story.

2
Source: Bloomberg
 8

Appendix 1: Financial results and Concordes forecasts

MAIN INDICATORS
2013 2014F 2015F 2016F 2017F 2018F
EPS (CZK) 67.2 55.8 39.2 34.3 38.4 43.3
EPS growth -13% -17% -30% -13% 12% 13%
DPS (CZK) 40 32 23 19 22 24
CFPS (CZK) 106 119 106 102 106 112
CFPS growth -21.1% 12.5% -10.9% -4.0% 4.4% 5.2%
Book value per share (CZK) 483 499 506 518 537 559
Market capitalisation (CZK mn) 336,325 336,325 336,325 336,325 336,325 336,325
Enterprise value (CZK mn) 515,472 521,009 517,435 510,409 496,476 482,394
Net debt (CZK mn) 174,098 180,287 177,363 170,989 157,706 144,275
Shares outstanding (th) 533,849 533,849 533,849 533,849 533,849 533,849

VALUATION
2013 2014F 2015F 2016F 2017F 2018F
P/E 9.4 11.3 16.1 18.4 16.4 14.5
P/CF 6.0 5.3 5.9 6.2 5.9 5.6
P/BV 1.3 1.3 1.2 1.2 1.2 1.1
EV/sales 2.4 2.5 2.5 2.4 2.2 2.1
EV/EBITDA 7.0 7.3 8.4 8.7 8.0 7.3
Dividend yield (%) 6.3% 5.1% 3.6% 3.0% 3.4% 3.8%
FCF yield (%) 8.5% 5.9% 7.5% 6.9% 8.3% 8.6%

MARGINS (%)
2013 2014F 2015F 2016F 2017F 2018F
EBITDA margin 33.9% 33.7% 29.5% 27.8% 28.1% 28.6%
Operating margin 21.1% 19.7% 14.6% 12.7% 13.3% 14.1%
Net profit margin 16.5% 14.1% 10.0% 8.6% 9.3% 10.1%

OTHER RATIOS (%)

2013 2014F 2015F 2016F 2017F 2018F
Sales growth 1.0% -3.1% -0.6% 1.3% 4.1% 4.2%
ROE 13.9% 11.2% 7.8% 6.6% 7.2% 7.8%
ROA 5.6% 4.6% 3.2% 2.8% 3.2% 3.6%
Net debt ratio 0.4 0.4 0.4 0.4 0.4 0.3
Net debt/EBITDA (x) 2.4 2.5 2.9 2.9 2.5 2.2
Quick ratio (x) 0.8 0.7 0.7 0.8 0.8 0.8
Interest cover (x) 7.2 6.4 4.8 4.3 5.0 5.8

SALES BREAKDOWN (CZK MILLION)

2013 2014F 2015F 2016F 2017F 2018F
Generation and Trade 64,930 57,195 47,665 43,486 44,612 46,584
Distribution 144,385 145,344 153,395 160,089 167,599 174,808
Mining 5,145 5,211 5,419 5,528 5,638 5,751
Other 2,813 2,813 2,813 2,813 2,813 2,813
 9

CONSOLIDATED PROFIT AND LOSS (CZK MILLION)

2013 2014F 2015F 2016F 2017F 2018F
Total revenues 217,273 210,563 209,292 211,916 220,663 229,956
Total operating expenses -171,518 -169,174 -178,826 -184,931 -191,236 -197,537
EBITDA 73,699 71,000 61,845 58,991 62,073 65,719
Operating profit 45,755 41,389 30,466 26,985 29,426 32,419
Total other expenses -1,315 -4,651 -4,871 -4,705 -4,381 -4,052
Income before income taxes 44,440 36,738 25,595 22,280 25,045 28,367
Income taxes -9,206 -7,611 -5,302 -4,615 -5,188 -5,876
Income after income taxes 35,234 29,128 20,293 17,665 19,857 22,491
Minority interest -651 -651 -651 -651 -651 -651
Net income 35,885 29,779 20,944 18,316 20,508 23,142
Dividends 21,354 17,272 12,147 10,257 11,485 12,728
Payout ratio 59.5% 58.0% 58.0% 56.0% 56.0% 55.0%

CONSOLIDATED BALANCE SHEET (CZK MILLION)

2013 2014F 2015F 2016F 2017F 2018F
Property, plant and equipment 426,560 440,648 440,770 439,863 436,017 433,417
TOTAL NON-CURRENT ASSETS 486,518 500,606 500,728 499,821 495,975 493,375
Receivables, net 67,509 65,424 65,029 65,845 68,562 71,450
TOTAL CURRENT ASSETS 154,618 148,384 148,447 149,715 152,917 156,300
TOTAL ASSETS 641,136 648,990 649,175 649,537 648,891 649,675
Retained earnings and other reserves 208,659 217,084 220,756 226,924 237,175 248,833
Total shareholders equity 258,076 266,501 270,173 276,341 286,592 298,250
Long-term debt, net of current portion 168,396 170,435 167,970 162,048 149,250 136,314
TOTAL LONG-TERM LIABILITIES 239,071 241,110 238,645 232,723 219,925 206,989
Short-term loans 2,716 2,716 2,716 2,716 2,716 2,716
Trade and other payables 63,423 61,464 61,093 61,859 64,413 67,125
TOTAL CURRENT LIABILITIES 119,716 117,757 117,386 118,152 120,706 123,418
TOTAL EQUITY AND LIABILITIES 641,136 648,990 649,175 649,537 648,891 649,675

CONSOLIDATED CASH FLOW (CZK MILLION)

2013 2014F 2015F 2016F 2017F 2018F
EBIT 45,755 41,389 30,466 26,985 29,426 32,419
Depreciation and amortization 36,366 29,612 31,379 32,006 32,646 33,299
Change in working capital -16,445 126 24 -49 -164 -175
Net cash from operating activities 56,470 63,516 56,566 54,326 56,720 59,668
Net cash from investing activities -27,987 -43,700 -31,500 -31,100 -28,800 -30,700
Net cash from financing activities -21,322 -23,965 -24,608 -22,774 -27,437 -28,472
Change in cash and equivalents 7,161 -4,149 458 453 484 496
 10

Appendix 2: Market drivers

ELECTRICITY PRICE [EUR/MWH] EU GAS [EUR/MWH]

COAL PRICE [USD/ METRIC TONNE] US GAS [USD/MMBTU]

WTI [USD/BBL.] AVERAGE CZECH TEMPERATURE 2013

CO2 [EUR/METRIC TONNE] AVERAGE CZECH TEMPERATURE 2014

Source: Bloomberg, Concordes forecast

 11

Appendix 3: Electricity price forecast

BLOOMBERGS FORECAST FOR BASELOAD PRICE

Baseload AVG MAX MIN
2008 65.8 88.3 53.3
2009 38.9 57.1 30.9
2010 44.5 55.5 39.2
2011 51.1 56.8 42.9
2012 42.7 54.9 35.5
2013 37.8 44.6 27.8
2014 33.3 39.3 27.9
2015 35.7 41.2 31.3
2016 34.7 40.2 30.5
2017 33.3 38.0 29.3
2018 33.2 38.0 29.4

Source: Bloomberg

CORRELATION MATRIX 2008-2014

Electricity Coal WTI CO2 Gas USA Gas EU

Electricity 1
Coal 0.704 1
WTI 0.322 0.352 1
CO2 0.410 0.137 0.145 1
Gas USA 0.141 0.161 0.184 0.036 1
Gas EU 0.763 0.639 0.299 0.163 0.196 1
Source: Bloomberg, Concordes forecast
 12

Appendix 4: CEZs segments

INSTALLED CAPACITY DISTRIBUTION BETWEEN ENERGY SOURCES [%]

GENERATION GROSS DISTRIBUTION BETWEEN ENERGY SOURCES [%]

UTILIZATION DISTRIBUTION BETWEEN ENERGY SOURCES [%]

Source: CEZs reports, Concordes forecast

 13

Appendix 5: CEZs peer group

PEER GROUP COMPARISON

EV/EBITDA DEBT/EV P/E P/BV EBITDA margin ROE

2014F 2015F 2013 2013 2014F 2015F 2013 2013 2013
CEZ 7. 3 8.4 0. 4 13 . 7 11. 3 16 . 1 1. 3 38.8 9.6
ENDESA 6.3 6.2 0.2 19.8 17.9 16.3 1.4 21.5 7.1
RWE 5.3 5.2 0.5 n.a 14.1 14.0 2.5 17.0 -29.1
IBERDROLA 8.7 8.5 0.5 15.1 15.8 15.3 1.0 21.7 6.7
E.ON 5.2 5.2 0.5 n.a 15.3 14.7 0.8 7.0 -0.3
VERBUND 13.1 11.3 0.4 9.4 43.4 27.7 1.1 51.3 4.0
EDF 4.8 4.6 0.7 11.8 12.2 11.8 1.2 22.8 10.7
FORTUM 11.9 12.3 0.3 5.7 17.0 17.5 1.5 38.8 28.3
PGE 5.0 5.2 0.1 10.0 11.6 13.0 0.9 25.7 9.6
ENEL 7.1 7.0 0.6 11.9 13.0 12.2 1.1 21.2 9.1
ENEA 4.0 3.9 0.2 7.9 10.8 11.7 0.6 19.6 7.7
TAURON 4.4 4.3 0.4 7.6 8.5 9.2 0.5 19.2 6.9
Av erage 6.3 5. 5 0. 4 11. 3 15. 9 15. 0 1. 2 25. 4 5. 9

Source: Bloomberg, Concordes forecast

Appendix 6: Dividend pay-out ratio and DPS

DIVIDEND PER SHARE AND PAY-OUT RATIO

Source: CEZs reports

 14

Appendix 7: Sensitivity analysis

TARGET PRICE SENSITIVITY: WACC VS. LONG TERM GROWTH RATE

Long-term growth rate

716 0% 0.5% 1% 1.5% 2% 2.5% 3%
3.5% 905 1,091 1,395 1,824 2,538 3,967 8,254
4% 759 899 1,118 1,405 1,837 2,555 3,992
4.7% 601 700 848 1,028 1,275 1,632 2,197
WACC
5% 554 642 772 928 1,135 1,426 1,862
5.5% 479 552 657 778 935 1,144 1,436
6% 417 478 564 662 785 942 1,152

TARGET PRICE SENSITIVITY: 10Y CZECH GOV. BOND VS. GROWTH RATE

Long-term growth rate

716 0% 0.5% 1% 1.5% 2% 2.5% 3%
0.5% 809 980 1211 1542 2056 2961 4983
1% 693 827 1002 1239 1582 2117 3072
10Y Czech
1.5% 593 700 835 1011 1251 1597 2138
goverment
bond 2% 522 611 722 862 1046 1299 1665
2.5% 457 532 623 736 880 1069 1329
3% 403 467 543 636 751 899 1093

TARGET PRICE SENSITIVITY: CZK/EUR VS. REALIZED BASELOAD PRICE

Realized baseload electricity price [EUR/MWh]

716 30 35 39 40 45 50 60
30 431 755 992 1078 1401 1724 2371
29 367 679 908 992 1304 1617 2241
CZK/EUR 28 302 604 825 905 1207 1509 2112
27 205 491 700 776 1062 1347 1918
26 173 453 658 733 1013 1293 1854

TARGET PRICE SENSITIVITY: ELECTRICITY PRODUCED VS. REALIZED BASE LOAD

Realized baseload electricity price [EUR/MWh]

716 30 35 39 40 45 50 60
60 271 567 828 864 1160 1456 2049
56 152 429 672 705 982 1259 1812
Electricity
55 134 408 649 682 955 1229 1777
produced [GWh]
54 93 360 594 626 893 1160 1694
52 33 290 516 547 804 1061 1575

TARGET PRICE SENSITIVITY: CZK/EUR VS. ELECTRICITY PRODUCED

Electricity produced [GWh]
716 52 54 55 56 60
30 882 974 997 1066 1250
29 802 891 913 980 1158
CZK/EUR 28 723 808 830 894 1066
27 603 684 705 765 928
26 563 643 663 723 882

Source: Concordes forecast

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DISCLOSURE

Concorde Securities Ltd. is a full-service Hungarian investment banking, investment management and brokerage firm.
We are a leading manager and underwriter of Hungarian equity offerings. We have investment banking and other
business relations with a substantial percentage of the companies traded on the Budapest Stock Exchange and
covered by our research department.
Concorde Securities Ltd. is registered in Hungary and does not have any subsidiaries, branches or offices outside of
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Concorde Securities Ltd. was the Lead Manager of the FHBs private and public share placement in November 2003.
The offering was an offshore transaction pursuant to Regulation S under the US Securities Act. Concorde Securities
Ltd. acted as the Co-lead Manager of Gedeon Richters exchangeable bond issue in September 2004.
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SUMMARY OF CONCORDES RECOMMENDATIONS