Cez As · PSECZ:CEZ
Cez As — Investor Presentation (August 2005)
60 slides from Cez As's investor presentation, August 2005
Slide 1: The Leader in Power Markets of Central and Southeastern Europe
THE LEADER IN POWER MARKETS OF CENTRAL AND SOUTHEASTERN Equity story August 2005 EUROPE
Slide 2: Agenda
AGENDA Summary for investors Introduction Scope of operations Financial performance Strategic initiatives of CEZ Group Integration and operational excellence Plant portfolio renewal M&A expansion 1
Slide 3: Summary for Investors
SUMMARY FOR INVESTORS Mission of CEZ is to become the leader in power markets in the Central and Southeastern Europe The largest Czech corporation and the largest corporation among 10 new EU member states The best performing European utility stock with growth at >300% in the last 18 months wit
Slide 4: CEZ Group provides some unique features for equity investors
CEZ GROUP PROVIDES SOME UNIQUE FEATURES FOR EQUITY INVESTORS Key factors Rationale Strong financial performance EBITDA margin 37% with growth Dynamic profit growth expected Growing power prices and consumption, to continue efficiency improvements and synergies Vertically integrated Stabl
Slide 5: Agenda
AGENDA Summary for investors Introduction Scope of operations Financial performance Strategic initiatives of CEZ Group Integration and operational excellence Plant portfolio renewal M&A expansion 4
Slide 6: International utility with dominant position in domestic market
CEZ GROUP IS AN INTERNATIONAL UTILITY WITH DOMINANT POSITION IN DOMESTIC MARKET AND GROWING PORTFOLIO IN THE BALKANS Target markets CEZ Group in Romania** (51% share in EDC Oltenia) Electricity sales (TWh) 6.8 Market share 13% Number of customers (million) 1.36 Market share 17% Installed c
Slide 7: Dominant player in all segments of the Czech electricity market
CEZ IS A DOMINANT PLAYER IN ALL SEGMENTS OF THE CZECH ELECTRICITY MARKET Lignite mining Generation Transmission Distribution Supply 5 out of 8 distribution 45% CEZ companies: 58% 22 million tons 74% ZCE, SCE, STE, 31.7 TWh 62.1 TWh VCE, SME 100% 63.4 TWh 62% of customers 55% Others 42% 17 million to
Slide 8: CEZ Group steadily increases production
CEZ GROUP STEADILY INCREASES PRODUCTION CEZ Group generation capacity Annual production of CEZ Group MW TWh 100% of Completion of Temelín 12,297 generation nuclear power plant Hydro (river 3% 2,000 MW accumulation 1,934 17% and pump storage) 62.1 61.4 Lignite off basin 52.2 54.1 50.8 and hard coal 2
Slide 9: Major investment program focused on emission reduction
MAJOR INVESTMENT PROGRAM WAS FOCUSED ON EMISSION REDUCTION Generation structure of CEZ Group CEZ Group emission change 2003/1993 TWh Percent 60 100% Hydro power plants 50 80% -50% 40 -77% Nuclear power plants 60% -95% -92% 1993 level 30 40% Desulphurized coal power plants 20 20% 10 Coal power plants
Slide 10: CEZ Group is the largest Czech company by any measure
CEZ GROUP IS THE LARGEST CZECH COMPANY BY ANY MEASURE Top Czech companies in 2004 By profitability By assets Income before income taxes Total assets, EUR billion* EUR million* CEZ Group 9.4 CEZ Group 598 Český Telecom 4.5 RWE Transgas 345 Škoda Auto 2.4 Mittal Steel 327 Unipetrol 2.4 Eurotel 275 Les
Slide 11: CEZ is the biggest company in new EU member states
CEZ IS THE BIGGEST COMPANY IN NEW EU MEMBER STATES Market capitalization of top 15 companies in 10 new EU member states* EUR billion 12 11.4 10 8.9 8.7 7.8 8 6.9 6.8 5.6 6 5.0 4.3 4.2 4.0 4 2.3 1.9 1.6 1.2 2 0 Z) Z) L) Z) L) I) L) L) L) U) ) L) ) Y) ) U U U (S (P (C (C (P (C (P (P (P (P (C (H (H (H
Slide 12: Vision: leader in power markets in Central and Southeastern Europe
VISION OF THE CEZ GROUP IS TO BE THE LEADER IN POWER MARKETS IN CENTRAL AND SOUTHEASTERN EUROPE Business Integrated utility focused on power generation, distribution and supply focus Present in related businesses where relevant (coal mining, heat generation) Our vision Priority Czech Republic
Slide 13: New management team is determined to fulfill the mission
NEW MANAGEMENT TEAM IS DETERMINED TO FULFILL THE MISSION Board of CEZ, a. s. CEO Trade Finance Generation Operations Alan Svoboda Petr Vobořil Martin Roman Jiří Borovec Radomír Lašák Responsibility Trading Treasury M&A Conventional Distribution Sales and Accounting Procurement genera
Slide 14: CEZ Group attracted many international shareholders
CEZ GROUP ATTRACTED MANY INTERNATIONAL SHAREHOLDERS Shareholders of CEZ, a. s. As of December 31, 2004 Types of funds investing in CEZ shares Emerging markets Hedge Institutional Investors Utilities (mostly international) Growth strategies 24.5% Examples of large foreign investors Baring A
Slide 15: Agenda
AGENDA Summary for investors Introduction Scope of operations Financial performance Strategic initiatives of CEZ Group Integration and operational excellence Plant portfolio renewal M&A expansion 14
Slide 16: CEZ is among top European power utilities
CEZ IS AMONG TOP 10 EUROPEAN POWER UTILITIES Top 10 European power utilities Number of customers in Europe, million 1 EdF 36.2 2 Enel 29.0 3 E.ON 26.0 4 RWE 20.8 5 Endesa 11.3 6 Iberdrola 9.6 7 DEI (PPC) 7.0 8 CEZ Group 6.6 9 Vattenfall 5.8 Czech Republic 3.4 Bulgaria 1.9 10 Electrabel 5.6 Rom
Slide 17: One of the most profitable utilities in Europe
CEZ GROUP IS ONE OF THE MOST PROFITABLE UTILITIES IN EUROPE AND WILL REMAIN SO EBITDA margin, 2004 Percent CEZ Group has advantageous low cost generation portfolio Electrabel 17.8 Lignite RWE 19.9 Long term fuel contract till 2050 for >90% of consumption E.ON 21.4 Prices capped at predefined f
Slide 18: CEZ stock has significantly out-performed the market
CEZ STOCK HAS SIGNIFICANTLY OUT-PERFORMED THE CZECH MARKET AS WELL AS EUROPEAN UTILITY Prices of shares and share indexes* Percent Current price CZK 587** 600% CEZ 500% 400% Price on Jan 1, 2003 300% CZK 92 PX50 200% BBG EUR Utilities Index 100% 0% 2003 2004 2005 CEZ shares are among the most liquid
Slide 19: Analysts maintain positive view on CEZ Group performance
ANALYSTS MAINTAIN POSITIVE VIEW ON CEZ GROUP PERFORMANCE Target share price CZK Current share 625 639 610 618 price CZK 587* 569 562 561 520 460 KB UBS Erste Deutsche Wood ING Raiffeisen CAIB Patria Bank Bank & Comp. Bank 7.6.05 12.7.05 3.8.05 8.8.05 10.08.05 16.08.05 22.08.05 23.08.05 24.08.05 Reco
Slide 20: Generation fleet is the main value driver
CEZ GENERATION FLEET IS THE MAIN VALUE DRIVER OF THE WHOLE GROUP EBITDA Growth drivers Contribution of various segments to consolidated EBITDA (2004) CZK billion Generation and trading Regional price convergence to German levels CO2 optimization 1% Increased capacity of nuclear 27% 100% plant
Slide 21: High dynamics in profit growth in line with analysts' expectations
CEZ GROUP MAINTAINS HIGH DYNAMICS IN PROFIT GROWTH IN LINE WITH ANALYSTS EXPECTATIONS CEZ EBIT of CEZ Group 2006 key growth drivers Analysts’ expectations EUR million ~ 15% price increase (as of August 24, 2005) Savings resulting from group consolidation Compensation of unbundling costs 891-1,
Slide 22: Dividend policy targets 50% dividend increase by 2008
CEZ DIVIDEND POLICY TARGETS 50% DIVIDEND INCREASE BY 2008 (COMPARED TO 2003) Net income and dividends (IFRS, consolidated) Dividend payout ratio CZK bn Percent 14 14 RWE 37% 12 12 Fortum 41% 10 10 CZK / Share 8 E.ON 41% 8 6 6 CEZ 41% 4 4 PPC 57% 2 2 Inberdrola 57% 0 0 2000 2001 2002 2003 2004 2005e
Slide 23: Very strong free cash flow to finance international growth
CEZ GROUP HAS VERY STRONG FREE CASH-FLOW THAT CAN BE USED TO FINANCE INTERNATIONAL GROWTH Free cash flow of CEZ Group (cumulative) EUR million 3,000 CEZ Group can finance foreign acquisitions 2,375 in the next 3-5 years from 1,750 free cash flow up to EUR 3,000 million without 1,125 impacting 500
Slide 24: Large operating cash flow in excess of investment needs
CEZ GROUP GENERATES LARGE OPERATING CASH-FLOW IN EXCESS OF INVESTMENT NEEDS CZK billion 50 50 Generation CAPEX 2005 CZK 3.3 bn – nuclear power plants CZK 0.9 bn – coal power plants CZK 2.3 bn – other 40 40 Distribution CAPEX 2005 30 30 CZK 5.3 bn – domestic distribution companies CZK 2.0 b
Slide 25: Finances under close scrutiny of rating agencies and bond investors
CEZ FINANCES ARE UNDER CLOSE SCRUTINY OF RATING AGENCIES AND BOND INVESTORS Credit rating of CEZ and Czech Republic CEZ bonds Amount Year Million Currency Placement Repayment CEZ BBB+ Matured Standard 1993 2,100 CZK Prague 1996 & Poor’s 1994 4,000 CZK Prague 1999 Czech 150 USD Luxembourg 1999
Slide 26: Least indebted utility in Europe with strong borrowing capacity
CEZ GROUP IS THE LEAST INDEBTED UTILITY IN EUROPE WITH STRONG ADDITIONAL BORROWING CAPACITY Additional borrowing capacity equals EUR 2 billion May be used on top of the free cash flow to finance acquisitions if large, interesting and properly priced acquisition targets appear Long-term debt/Total
Slide 27: Cash flow 2005-09 equals almost 85% of market capitalization
CASH FLOW GENERATED BY CEZ IN 2005-09 EQUALS ALMOST 85% OF ITS CURRENT MARKET CAPITALIZATION Cash flow generation 2005-09 EUR billion 11.4 Market cap almost 9.6 85% covered by cash in next 5 years 3.5 55% If no value increasing 2.3 acquisition 3.0 opportunities 0.8 secured distribution to shareh
Slide 28: Agenda
AGENDA Summary for investors Introduction Scope of operations Financial performance Strategic initiatives of CEZ Group Integration and operational excellence Plant portfolio renewal M&A expansion 27
Slide 29: Four key strategic initiatives
CEZ GROUP HAS LAUNCHED FOUR KEY STRATEGIC INITIATIVES Vision and corporate targets Integration Plant and M&A portfolio operational expansion renewal excellence (2004-08) (2007-20) (2004-10) Performance-oriented culture 28
Slide 30: Performance oriented culture is a precondition for all initiatives
PERFORMANCE ORIENTED CULTURE IS A PRECONDITION FOR ALL OTHER INITIATIVES Implementation 7 principles of CEZ performance-oriented culture program 1. Value creation is the top priority Top and middle management 2. Enforcing individual responsibility for reaching meetings/ ambitious goals/results wor
Slide 31: Agenda
AGENDA Summary for investors Introduction Scope of operations Financial performance Strategic initiatives of CEZ Group Integration and operational excellence Plant portfolio renewal M&A expansion 30
Slide 32: Strategic initiatives target value enhancement
STRATEGIC INITIATIVES TARGET VALUE ENHANCEMENT Integration and Plant portfolio operational M&A expansion renewal excellence EBITDA Margin Maintain/increase Acquire assets growth improvements installed capacity abroad with drivers Costs savings/ with competitive performance synergies plants u
Slide 33: Market factors drive attention to domestic market
MARKET FACTORS DRIVE CEZ’S ATTENTION TO DOMESTIC MARKET Development of CEZ Group sales Key drivers TWh Domestic sales driven by Domestic sales growing demand across all Exports customer groups 49.8 50.8 Exports influenced by high cross-border transmission costs 37.2 Since CO2 trading mechanism
Slide 34: Second largest exporter of power in Europe
CEZ GROUP IS SECOND LARGEST EXPORTER OF POWER IN EUROPE, PROVIDING POWER TO CENTRAL EUROPEAN COUNTRIES Net exports in 2004 TWh Structure of CEZ exports in 2004 France 64.5 Poland ČR 15.7* 3% Germany Poland 10.3 60% Germany Slovakia 8.1 Austria 30% 7% Slovakia 1.9 Diversification of target export mar
Slide 35: Wholesale prices offered by CEZ are the lowest in the region
WHOLESALE PRICES OFFERED BY CEZ ARE THE LOWEST IN THE REGION Wholesale power price* Existing pricing 2005, baseload, EUR/MWh Has been a result of influence of higher +72% German prices and potential cheaper Export markets Import markets imports from Poland and Slovakia Will be changed with full
Slide 36: Gap between electricity prices in Czech Republic and abroad remains wide
GAP BETWEEN ELECTRICITY PRICES IN THE CZECH REPUBLIC AND ABROAD REMAINS WIDE Wholesale electricity prices (baseload) 2000 index 260 +24.0% EEX Forward 2006 240 43.7 EUR/MWh 220 200 180 160 140 +15.1% Czech Republic 2006 120 35.1 EUR/MWh +11.4% 100 80 60 2000 2001 2002 2003 2004 2005 2006 Source:CEZ,
Slide 37: Domestic and export prices are converging to international levels
DOMESTIC AND EXPORT PRICES ARE CONVERGING TO INTERNATIONAL LEVELS German wholesale price 43 Net export prices 35 Domestic annual Transmission capacity fee baseload wholesale prices 24.5 24.8 27.1 30.2 35 EUR/MWh* 2002 2003 2004 2005 2006 forward prices Price change 1.5% 9.1% 11.3% 15.1% Percent 34.5
Slide 38: CO2 emission permits help hedge exports
CO2 EMISSION PERMITS HELP CEZ TO HEDGE ITS EXPORTS Electricity price*** Emission permit’s price Electricity CO2 EUR/MWh EUR/MWh EUR/t 48 35 Emission 46 Export Minimum 30 permit’s 44 margin margin price** 42 25 40 Cross 38 20 border 36 capacity fee Total 15 34 variable Variable costs 32 10 costs * 30
Slide 39: Allocation of CO2 permits allows increased lignite generation
ALLOCATION OF 36.9 TONS OF CO2 EMISSION PERMITS PER YEAR FOR 2005–07 ALLOWS CEZ TO INCREASE GENERATION IN LIGNITE-FIRED POWER PLANTS BY 5.3% Market value of additional allowances EUR 41 million/year 40.8 37.3 36.9 +5.3% 35.1 35.5 33.7 Carbon dioxide Carbon dioxide Allocation Electricity Generation C
Slide 40: Benefit from fast growing demand and shut down of old plants
GOING FORWARD, CEZ GROUP WILL BENEFIT FROM FAST GROWING DEMAND AND FORCED SHUT DOWN OF OLD PLANTS Power consumption in the Czech Republic Estimated capacity reduction in Central Europe by 2010 TWh Installed capacity, MW 66 64 NPP phase out – Bohunice A1 % Slovakia 1,540 62 H1 2005 2. 0 environmental
Slide 41: Additional 8.7 TWh from increased utilization of plants
ADDITIONAL 8.7 TWh CAN BE GENERATED BY INCREASING UTILIZATION OF NUCLEAR AND COAL PLANTS Current utilization Auxiliary services Time utilization of generation capacity Reserve for higher utilization Percent of hours p.a. Overhauls, outages Nuclear 77 3 20 100% Higher sales opportunity due to Impro
Slide 42: CEZ Group increased sales margin while maintaining market share
CEZ GROUP INCREASED SALES MARGIN WHILE MAINTAINING MARKET SHARE Domestic wholesale baseload Distribution regions of CEZ Group CZK/MWh + 15.1% + 11.4% 1,041 906 813 Děčín 2004 2005 2006 Market share in power retail Hradec Králové Percent of MWh Praha 58% 58% ? Ostrava Plzeň Target: maintain Brno Česk
Slide 43: Regulatory environment in the Czech Republic is fair and transparent
REGULATORY ENVIRONMENT IN THE CZECH REPUBLIC IS FAIR AND TRANSPARENT <2002 2002-04 2005-09 Prepare team 1st regulatory period 2nd regulatory period Czech energy regulator Introduction of RPI-X Regulation parameters established regulation reassessed for distribution* Introduction of TPA to gr
Slide 44: Project Vision 2008: transparent holding structure
WITHIN PROJECT VISION 2008 CEZ GROUP WILL REORGANIZE ITSELF INTO A TRANSPARENT HOLDING STRUCTURE … CEZ CEZ Group Generation Project Generation Wholesale trading Vision 2008 Wholesale trading Sales Distribution company 5 CEZ Prodej CEZ Distribuce Distribution company 4 Sales Distributio
Slide 45: Almost EUR 100m in annual savings
… AND ACHIEVE ALMOST EUR 100m IN ANNUAL SAVINGS Gross costs saving* in 2004-08 Total annual costs EUR million savings related to Vision 2008 project are to reach CZK 2.9 bn by 258 2008, i.e., ~10% 2004 operating costs in supply 95 and distribution segment (excluding purchased electricity) 76 Key con
Slide 46: Number of employees will decline by 1,800 by 2008
NUMBER OF EMPLOYEES WILL DECLINE BY 1,800 BY 2008 TOTAL COSTS SAVINGS WILL REACH CZK 2.9 BN Number of employees in CEZ Group CR Thousands 20 -10% 18,100 18 - 300 - 200 - 400 - 600 16,300 - 200 16 14 12 10 2003 2004 2005 2006 2007 2008 2008 Source: CEZ 45
Slide 47: Agenda
AGENDA Summary for investors Introduction Scope of operations Financial performance Strategic initiatives of CEZ Group Integration and operational excellence Plant portfolio renewal M&A expansion 46
Slide 48: Large portion of power plants at the end of their lifetime
LARGE PORTION OF CEZ POWER PLANTS WILL BE AT THE END OF THEIR LIFETIME Age structure of CEZ thermal blocks MW Portion of CEZ thermal capacity approaches end 3,000 2,800 of its life time in 2010-20 2,500 Also desulphurization equipment to reach end 2,000 of its lifetime in 2015 -2020 1,550 1,512
Slide 49: Future plant fleet built around new generation of lignite plants
CEZ INTENDS TO BUILD ITS FUTURE PLANT FLEET AROUND NEW GENERATION OF LIGNITE PLANTS Coal Nuclear Gas Renewables Environ- Acceptable emissions No emissions Low emissions Limited/no emissions mental if well designed/ Nuclear risk No resources impact managed depletion Competitive Low cost
Slide 50: Finalized plans for lignite plants renewal
CEZ HAS FINALIZED PLANS FOR LIGNITE PLANTS RENEWAL AND NOW DEVELOPS STRATEGY IN OTHER FUELS Capacity Best case* MW Conservative 7,000 Retrofits Existing plants 6,000 5,000 In the Best case CEZ would maintain existing capacity till c. 2035 4,000 Otherwise c. 30% reduction after 2015 3,000 2,000 R
Slide 51: Lignite plants renewal capex to reach CZK 100 bn
LIGNITE PLANTS PORTFOLIO RENEWAL RELATED CAPEX TO REACH CZK 100 BN AND BRING 14-25% EFFICIENCY UPLIFT Expected CAPEX – conservative scenario Projects overview CZK million Highly profitable Secured fuel – low risk 14,000 2008-15: Main Assets Renewal Period Retrofits 12,000 Gross efficiency impr
Slide 52: Agenda
AGENDA Summary for investors Introduction Scope of operations Financial performance Strategic initiatives of CEZ Group Integration and operational excellence Plant portfolio renewal M&A expansion 51
Slide 53: Grow both in generation and distribution/supply
CEZ GROUP WANTS TO GROW BOTH IN GENERATION AND DISTRIBUTION/SUPPLY Ambition for distribution/supply growth Ambition for target generation growth Millions of customers MW of installed capacity ~20,000 ~10.0 6.6 12,297 Bulgaria 1.9 Hydro 1,934 Romania 1.3 Coal 6,603 Czech 3.4 Republic Nuclear 3,760 CE
Slide 54: Best positioned to succeed in Central and Southeastern Europe
CEZ GROUP IS BEST POSITIONED TO SUCCEED IN THE REGION OF CENTRAL AND SOUTHEASTERN EUROPE Intimate knowledge of the region Very well accepted, successful but “local” investor due to close cultural/historical ties First-hand experience with transformation of power markets Natural hedge to curr
Slide 55: Prudent in M&A decisions
EVEN THOUGH CEZ GROUP HAS AMBITIOUS EXPANSION PLANS, WE ARE VERY PRUDENT IN OUR M&A DECISIONS Key criteria for M&A decisions M&A process Target attractive on standalone Always along a global advisor basis (market position, asset with target country ties quality) Valuation prepared by advisor S
Slide 56: Large number of potential targets in the region
THERE IS LARGE NUMBER OF POTENTIAL TARGETS IN THE REGION OF CENTRAL AND SOUTHEASTERN EUROPE Target markets Main acquisitions opportunities Central 2005-06 Europe Bulgaria: generation – TPPs Varna, Ruse Romania: distributors Muntenia Sud, generation – TPP Turceni, Rovinari, Craiova Poland: gene
Slide 57: CEZ participates in all pending privatizations
CEZ PARTICIPATES IN ALL PENDING PRIVATIZATIONS IN THE TARGET REGION Varna Ruse Muntenia Sud Installed capacity (MW) 1,260 Installed capacity (MW) 400 Number of customers (million) 1.1 Sales (2004, GWh thousands) 2,463 Sales (2004, GWh thousands) 421 Sales (2004, TWh) 4.3 Sales (2004, E
Slide 58: Acquisition of EDC Oltenia almost complete
THE ACQUISITION OF EDC OLTENIA IS ALMOST COMPLETE AND INTEGRATION HAS STARTED Acquisition of distribution in Romania 51% share in EDC Oltenia*, adjacent to the Bulgarian EDCs Status CEZ Group selected as a tender winner SPA signed; settlement expected in 9/2005 Strong CEZ management team on th
Slide 59: Integration of Bulgarian EDCs progressing faster than expected
THE INTEGRATION OF THE BULGARIAN EDCs IS PROGRESSING FASTER THAN EXPECTED Acquisition of distribution in Bulgaria Status 67% in three EDC Control gained faster than expected thanks to tight project management Corporate governance changes to secure control over all three EDCs Team of 3 observer
Slide 60: Fast integration in Bulgaria brings early results
FAST INTEGRATION IN BULGARIA BRINGS EARLY RESULTS Unified organizational structure across all three EDCs implemented All three EDCs adopted international accounting standards Energy losses were reduced by ~10% in all three EDCs during the first half of 2005 Coordination of selected activitie