CEZ Group. Legal/ownership status The CEZ Group, is a joint stock company whose shares are divided as follows (%):

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1 CEZ Group Background CEZ was incorporated as a joint stock company in May 1992, becoming one of several successor entities to Ceske energeticke zavody ( Czech Power Works ), the integrated national utility that had existed in the Czech Republic in communist and immediately post-communist times, also known by the acronym CEZ. (A single Czechoslovak power trust had been split up into Czech and Slovak components in the late 1960s.) At the time of its establishment, CEZ included the high-voltage (220kV and 400kV) transmission grid, the majority of electricity generation capacity in the Czech Republic, and some district heating systems. It also had a monopoly on export and import of power. CEZ had no role in electricity distribution aside from direct supply of electricity to certain large industrial consumers, though it owned minority stakes in some discos. Significant developments in the following decade included: Mass privatisation, in which a minority of CEZ shares were divested; The permanent connection of the Czech transmission system to UCTE in 1997; Extensive work on desulphurisation of coal-fired Czech plants, including those of CEZ (the company s programme absorbed Kc42bn in the period ); The commissioning of the controversial Temelin NPP, which was added to CEZ s portfolio (the first reactor came on stream in 2001, the second in early 2003); A government decision in 2000 to complete the privatisation of CEZ (which still awaits implementation); Extensive cost-cutting in the years following 2000 (the workforce was reduced by more than 20% by end-2002, while monthly output per employee rose from 467 MWh in 2002 to 613 MWh. In a move designed to buttress CEZ s position in the context of a partially liberalised energy market, the government arranged a deal in 2002 under which CEZ bought majority stakes in five of the country s eight regional discos and minority stakes in the other three (for Kc32bn), while selling the state 66% of its 100% stake in CEPS, the national grid company (for Kc15bn) with the Kc21bn owed to the state (including Kc4bn capital gains tax) payable in instalments by A decision in December 2002 by the national competition authorities required CEZ to dispose of its minority stakes and of one of its five majority stakes, though subsequent modifications have removed time pressure in the latter respect. The disposals have been carried through by share swaps, largely with the German companies RWE and E.On, which has consolidated CEZ stakes in the distributors it intends to keep (see below). The CEZ Group was established on April 1, 2003, registering these changes, though work on practical assimilation of the discos has continued through Legal/ownership status The CEZ Group, is a joint stock company whose shares are divided as follows (%): State Property Fund (SPF) Foreign physical persons 0.16 Foreign juridical persons Domestic physical persons 4.30 Domestic juridical persons (other than SPF) 5.69 Asset managers 9.67 The current structure reflects the outcome of voucher privatisation in the 1990s. An attempt to privatise the state s remaining stake of 67.6% in CEZ in 2002 failed: varying degrees of interest were expressed by foreign players including Italy s Enel, Spain s Iberdrola, the German firms E.On and RWE, France s EdF, Belgium s Electrabel and a consortium of International Power and NRG. None proved willing to pay the Kc200m required by the state for a package including the CEZ stake, CEPS, and the state s share in six discos; requirements for annual purchase of 27.7m tpa of brown coal were also unwelcome, while the 1

2 inclusion of CEZ s nuclear capacity was also a problem for some. Future privatisation plans have not been firmed up, but as of January 2004, the government is considering a flotation of 15-16% in 2005 and sale of the remaining 51-52% in 2006 at the earliest. The CEZ Group owns shares in a variety of companies (see below for details): results for January- September 2003 refer to a consolidated unit comprising 33 companies, 22 of them fully consolidated. Financial Performance The CEZ Group is large, being the Czech Republic s biggest company, Europe s tenth largest power utility, and the continent s second biggest power exporter (after EdF). The following figures refer to the CEZ Group as a whole and, unless otherwise stated, to 9-month performance in 2003 or to the state of affairs at end-september 2003 (since CEZ underwent significant restructuring at the start of April 2003, full-year results for 2002 are potentially misleading; 9-month totals for 2002 are referred to occasionally for the purpose of comparison; the exchange-rate for the Czech koruna [Kc] was Euro1:Kc at end- September 2002 and Euro1:Kc at end-september 2003): Turnover: Kc58.0bn (up from Kc39.5bn in Jan-Sep 2002, given Group s enlargement to include distributor activities and higher electricity sales). Net income: (IFRS) Kc13.2bn, up from Kc6.5bn in Jan-Sep Electricity generated: 45.0TWh in first nine months of which NPPs 41.1%, fossil fuel 56.9% and a record 60.9TWh in full year, up 12.6% on 2002 total of 54.1TWh. Share of CEZ power plants in supplying Czech Republic s total net electricity consumption: 62.6% of 39.7TWh (compared to 57.2% of 38.8TWh in 2002) Electricity sold on domestic market: 35.7TWh, up 9.2TWh (34.9%) on Jan-Sep 2002 (around 75% of the growth resulting from enlargement of company). Total electricity supplied to grid: 41.2TWh (up from 36.7TWh in Jan-Sep 2002) Electricity exports: 13.9TWh (up from 12.0TWh in Jan-Sep 2002) Electricity imports: 409GWh (down from 415GWh in Jan-Sep 2002) Installed capacity: 12,294MW at end-sept 2003, up from 11,146MW at end-dec 2002 Operating revenues: Kc58,046m (compared with Kc39,543m in Jan-Sep 2002) Revenues from sales of electricity Kc54,955m (up from Kc37,761m in Jan-Sep 2002) Revenues from heat sales and other activities: Kc3,091m (up from Kc1,782m in Jan-Sep 2002) Assets: Kc293,849m at end-sep 2003 (up from Kc231,465m at end-dec 2002) Fixed assets: Kc257,718m at end-sep 2003 (up from Kc216,112m at end-dec 2002) Long-term liabilities: Kc60,961m at end-sep 2003 (up from Kc59,595m at end-dec 2002) Long-term debt (net of current portion): Kc32,231m at end-sep 2003 (down from Kc35,729m at end-dec 2002) Number of employees: 18,366 at end-sept 2003, up from 7,677 at end-dec 2002 (given acquisition of distribution assets). Number of eligible customers served by CEZ Group at end-september 2003: 237 (out of a total of 341). Areas of activity Electricity Generation: CEZ is the largest power producer in the Czech Republic. Its portfolio includes most types of capacity except gas-fired though its wind and solar facilities are on a pilot scale only) and according to CEZ Group s website consists of the following: Two NPPs, installed capacity 3,760MW: (Temelin 2,000MW, Dukovany 1,760MW); Ten coal-fired TPPs, installed capacity 6,978MW (Detmarovice 800MW, Hodonin 95.6MW, Chvaletice 800MW, Ledvice 520MW, Melnik 940MW, Pocerady 1,000MW, Porici MW [plus heating capacity], Prunerov 1490MW, Tisova 422MW, Tusimice 800MW); 12 HPPs, installed capacity 1,821MW (Dalesice 450MW, Dlouhe Strane 650MW, Hnevkovice 9.6MW, Kamyk 40MW, Korensko 3.6MW, Lipno 123MW, Mohelno 182MW, 2

3 Orlik 182MW, Slapy 144MW, Stechovice 22.5MW, Vrane 13.92MW, Zelina [a small HPP now integrated with Vrane]); One wind-powered facility (Mravenecnik, 1.165MW) One solar-powered facility (also at Mravenecnik, 10kW) Transmission: As noted above, CEZ sold 66% of its 100% stake in transmission network operator CEPS to the state in April 2003, and must sell the remaining 34% under a subsequent decision of the country s competition authority. Distribution: Following the redistribution of assets carried out in early 2003, CEZ has majority stakes in five regional discos, namely: Severomoravska energetika (North Moravian Electricity, 89.36%) Strednoceska energetika (Central Bohemian Electricity, 97.72%) Severoceska energetika (North Bohemian Electricity, 58.93%) Zapadoceska energetika (West Bohemian Electricity, 99.08%) Vychodoceska energetika (East Bohemian Electricity, 91.81%) In addition, CEZ still has a 34% stake in Prazska Energetika, the disco serving the capital city of Prague, though it is bound to sell or swap this. Domestic electricity trading: CEZ plays a key role on the country s liberalised electricity market, both directly and via the trading activities of its discos. In 2001 it launched Rainbow Electricity, a scheme designed to allow end-users to choose the optimum mix of power in terms of capacity type and timing (the scheme has mostly been oriented to business users, but household customers in some regions have also been benefitting since 2003). Export and import: Generation capacity in the Czech Republic considerably exceeds the requirements of domestic users, hence export is significant the net exports of the CEZ Group in the first nine months of 2003 were around 13.5TWh, out of total output of 45TWh. Electricity-connected service activities: Companies wholly or partially owned by the CEZ group perform design services (OSC), construction and operation of small HPPs (Hydrocez), and maintenance and repairs of power machinery (CEZ Energoservis, Energeticke Opravny, I&C Energo). Other areas of activity: As emerges from revenue figures cited above, CEZ Group s revenues derive overwhelmingly from the sale of electricity. Most subsidiary activities are somehow connected with electricity, though some diversification has taken place. Important areas are: Coal: Severoceske Doly, in which CEZ Group owns 37.2%, is involved in the mining and sale of brown coal, on which most of CEZ Groups TPPs run. In October 2003, CEZ announced that it would bid for the state s 55% stake in this firm in order to protect its minority interest and control its main supplier and also expressed interest in the 48.7% stake on offer in Sokolovska Uhelna, another brown coal mining firm. Ministerial reaction was sharp, however: integrating brown coal and power was not desirable and would distract CEZ from its strategic aims of foreign expansion. The clash is thought to have contributed to the sacking of the CEZ Group CEO shortly afterwards. Limestone: Two companies in which CEZ Group has majority stakes are involved in extraction, processing and sale of limestone, which is used for desulphurisation. Heat/water: CEZ owns a 34% stake in Vltavotynska Teplarenska, a regional utility involved in generation, purchase, transmission and distribution of heat, as well as water, sewerage and wastedisposal systems. It also has a 49% stake in JVCO, which constructs and upgrades heat systems (as well as buying and distributing electricity and gas). Telecoms/IT: CEZ Group is 100% owner of the telecoms firm Ceztel and of Ceznet, which provides services in data processing, database maintenance, network administration, and telecom systems installation and maintenance (as well as business and financial consulting). Construction materials: CEZ Group has stakes in two firms in this area (40% and 50%). Finance: CEZ Finance offers services connected with Eurobonds. Position on home market and implications for foreign expansion Thanks partly to the deal which gave it control of several Czech discos in at a very low price, according to critics CEZ s domestic market position and its finances are fairly strong. The sharp rise in net profits in the first nine months of 2003 was due largely to the proceeds from the sale 3

4 of CEPS (also arguably at a price favourable to CEZ), but operating profits grew somewhat when many commentators expected them to fall though one factor in this was the hot summer of 2003, which boosted export demand. Economies that will result once the discos are fully assimilated will also improve CEZ s financial position (by as much as Kc2bn, according to some estimates), especially as the discos are arranged in a continuous territorial swathe stretching from the west to the east of the Czech Republic (and bordering conveniently on Poland, Hungary, Slovakia and Ukraine). Relative to other financials, finally, CEZ s long-term debt is fairly low. Hence, CEZ has some capacity for foreign expansion. CEZ also has some need for foreign expansion. Control of discos buttresses its domestic market share, but liberalisation and consumers option of imports has increased pressure on CEZ, while its production capacity is considerably in excess of domestic requirements. This applies especially now the Temelin NPP has come on stream, saddling CEZ with 2,000MW of what some would argue is illjudged and expensive capacity. CEZ s main concern will be to sell to the huge neighbouring German market. This it will try to do by means of alliances rather than acquisitions, though it has made relatively little progress in this so far. But acquisitions in former socialist countries will also play a part in assuring CEZ of markets. The weaknesses in CEZ s position would appear to be threefold: Politically, the sacking of the highly successful CEO Jaroslav Mil in autumn 2003 shows that CEZ s plans are still hostage to state interference. On this occasion, the government seemed to be acting against plans (coalmine acquisitions) that might interfere with CEZ s foreign ambitions, of which it openly approved. This might change, however. Financially, CEZ might not be able to afford as much expansion as it would like. Shortly before he was sacked, Mil declared that Kc20bn was being set aside for acquisitions in Poland, Slovakia and Bulgaria over the next three years. The good news is that CEZ plans to find this without increasing long-term debt (from current income and by short-term bridging loans). The bad news is that many analysts doubt whether it will be enough for all three planned acquisitions. The government s refusal to allow coalmining acquisitions, while it leaves CEZ with more money in the short term for foreign acquisitions, may weaken its position in the longer term: the most likely buyer for both mining stakes is the local Appian Group, whose success would threaten to increase CEZ s coal procurement costs (as well as probably forcing a write-down of its minority stake in Severoceske Doly). Activities in Southeast Europe CEZ is regarded as a strong contender in the privatisation of Bulgaria s electricity discos. As of January 2004 it has been certified as eligible and bought tender documentation, and it is thought certain to bid. One CEZ official commented that a purchase would allow both sides to create a strong group in the former Eastern Bloc s energy sector, which will act as a respectable counterweight to energy concerns from EU countries. According to the rules of the Bulgarian tender, CEZ can bid for all three disco packages on offer, but only actually buy one of them. No specific intentions for acquisitions elsewhere in the region have been announced CEZ has shown no signs of interest in Romania s discos, the only ones so far on offer apart from Bulgaria s. The Financial Times has speculated that success in Bulgaria might be used as a springboard into other Balkan countries such as Croatia and Serbia. Activities on other foreign markets CEZ has bid for its Slovak counterpart Slovenske Elektrarne (SE), in which a 66% stake is to be offered by the state in summer One of five contenders, CEZ is thought to stand a good chance because it is willing to take on the firm s nuclear facilities, which account for two-thirds of SE s capacity and which the Slovak authorities would prefer to include in the sale. Of other possible buyers, only Russia s UES is similarly minded, while the others only want SE s HPPs and TPPs. There is an obvious geographical and historical logic to this Slovak acquisition the two utilities were part of the same company till the late 1960s and of the same national system till The last-minute nature of CEZ s bid, however, has prompted some to speculate that it was a matter more of bargain hunting than 4

5 of grand strategy. Success would, incidentally, aggravate rather than ease CEZ s problem of finding markets for power from excess generating capacity. Acquisitions of Slovak discos were considered briefly in 2001, but rejected. CEZ has made clear its interest in disco acquisitions in southern Poland which borders conveniently on its own Czech distribution territory. It is not clear when these will be offered, however. Similarly, its eastern disco Vychodoceska Energetika is handy for Ukraine, a country to which CEZ hopes to export. CEZ officials statements, however, suggest that disco acquisitions there have been ruled out. 5