CEZ GROUP 1 INVESTMENT RECOMMENDATION TO DECEMBER 21, 2010 1 CFA INVESTMENT RESEARCH CHALLENGE MARCH 3, 2011 MADRID

CEZ GROUP

1INVESTMENT RECOMMENDATION TO DECEMBER 21, 2010 1

CFA INVESTMENT RESEARCH CHALLENGE

MARCH 3, 2011

MADRID

CZECHCEZ GROUP

22ASSUMPTIONS CEZ GROUP PEER GROUP COMPARISON

FINANCIAL ANALYSIS VALUATION INVESTMENT

RISKS RECOMMENDATION 2

CZECH REPUBLIC

•Technical University of Ostrava

CEZ GROUP

•European power utility

VALUATION

•2 phases DCF equity method

INVESTMENT RECOMMENDATION

CZECHVALUATION ASSUMPTIONS

33

VALUATION

Company profile

Industry profile

Financial analysis

Planned statements

Free cash flow prediction

Beta, cost of capital

ASSIGNMENT• Risk averse investor• Three years perspective• Valuation to 21.12.2010

TARGET PRICE 807 CZK• 2 phases DCF equity method• Investment risks• Actual issues

RECOMMENDATION HOLD

ASSUMPTIONS CEZ GROUP PEER GROUP COMPARISON



CZECHCEZ AS INTERNATIONAL UTILITY

4

Source: Company data, Czech team research

MAJOR ELECTRICITY PRODUCER IN THE CZECH REPUBIC

74% of market 70% MoF 32.707 emp

ONE OF TEN BIGGEST EUROPEAN POWER UTILITIES

65,3 TWh 17 countries 60 plants

PRODUCTION BASED ON LIGNITE AND NUCLEAR POWER

45% lignite 42% nuclear 13% other

44% OF REVENUES IN POWER PRODUCTION

39% distribution 4% mining 14% other

4ASSUMPTIONS CEZ GROUP PEER GROUP COMPARISON



Iberdro

laEnel

Verbund

PGECEZ

Fortu

m EDPEDF

Tauron

E.ON

RWE

Centrica

0.05.0

10.015.020.025.030.035.040.045.050.0 EBITDA margin

Industry average 25,5

CZECHCOMPANY COMPARISON

5

Source: Czech team estimates, Reuters

5

RWE

Centrica EDF

Tauron

Verbund

PGE

Fortu

m

Iberdro

laE.O

NCEZ

EnelEDP

0.02.04.06.08.0

10.012.014.016.018.020.0 P/E

9,7x

Industry average 12,1x

RWE

Enel

Verbund

E.ON

Iberdro

la CEZEDF

EDP

Centrica

Fortu

m0

2

4

6

8

10

12

14Dividend yield

6,48%

RWE

Enel

Verbund

PGEE.O

N

Iberdro

la

Fortu

mTauro

nCEZ

EDP

Centrica EDF

02468

101214

EV/EBITDA

Industry average 7,6x

6x

43

Industry average 5,6%



RISKS RECOMMENDATION 5Data to 21/12/2010

CZECHFINANCIAL ANALYSIS

66

Source: Company data, Czech team estimates




EBIT/Assets

Revenues/Assets

Revenues/Current Assets

Equity/Assets

ROE

ROA

ROS

ROC

ROCE

EBITDA margin

-150%

50%

250%

20052006


77





EBIT/Assets

Revenues/Assets


Equity/Assets

ROE

ROA

ROS

ROC

ROCE

EBITDA margin

-150%

50%

250%

20052007


88





EBIT/Assets

Revenues/Assets


Equity/Assets

ROE

ROA

ROS

ROC

ROCE

EBITDA margin

-150%

50%

250%

20052008


99





EBIT/Assets

Revenues/Assets


Equity/Assets

ROE

ROA

ROS

ROC

ROCE

EBITDA margin

-150%

50%

250%

20052009


1010





EBIT/Assets

Revenues/Assets


Equity/Assets

ROE

ROA

ROS

ROC

ROCE

EBITDA margin

-150%

50%

250%

20052010


1111

Source: Reuters, Bloomberg, Company data, Czech team estimates

2005 2006 2007 2008 2009 2010*05

101520253035

ROEEnel

CEZ

EDF

RWE

Iberdrola

E.ON

EnelCEZ

Centrica EDP

EDF

Tauron

RWE

Iberdro

la

Verbund

PGE

Fortu

mE.O

N02468

1012 ROA 2010*




EBIT/Assets

Revenues/Assets


Equity/Assets

ROE

ROA

ROS

ROC

ROCE

EBITDA margin

60%

80%

100%

20092010

TEAM E

1212

CZECHVALUATION BASE

2,0102,011

2,0122,013

2,0142,015

2,0162,017

2,0182,019

2,02020,00025,00030,00035,00040,000

Estimated free cash flows to equity (mil. CZK)


2,010 2,011 2,012 2,013 2,014 2,015 2,016 2,017 2,018 2,019 2,020

-10.00%-8.00%-6.00%-4.00%-2.00%0.00%2.00%4.00%6.00%8.00%

10.00%

Relative changes of chosen value drivers

Y.oY.change of EBITDA margin Y.oY.change of sales Y.oY.change of dividends Y.oY.change of Price Y.oY.change of EAT




TEAM E

1313

TEAM EVALUATION

Ratio between phases of DCF equity

34%

66%

1. PHASE2. PHASE


Phase 1 : 2011 - 2017 Phase 2 : 2018 - ∞

Levered β 0,99 0,99

Rm 6,29% 6,99%

Rf 3,64% 4,00%

Re 6,26% 8,50%

g 1,49%

Values in mil. CZK

Value of phase 1 148 795

Continuing value (perpetuity) 436 668

Value of phase 2 285 405

TOTAL VALUE 434 201

Number of issued shares (pieces) 537 989 759

VALUE OF SHARE (in CZK) 807,080

Enterprise value 532 200

Indebtness 32,61%




Ratio between phases of DCF equity

700

750

800

850

900

950 max; 942

min; 741.5

Target price, 807

Market price, 772

Share price as for 21/12/2010 (in CZK per diluted share)

In 52 weeks

TEAM E

14

Volatility of exchange rate•Business with foreign countries

Possible drop in rating•Possible price increase of debt

Unstable political situation•In the Czech Republic and in

other countries

Low power prices

•Contra high fixed costs

14

CZECHINVESTMENT RISKS




CZECHPOWER PRICES

1515

30

50

70

90

Historical power prices (EUR)

2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 202040

45

50

55

60

65

70

52 52 51 5254

56 5759

6163

65

PXEEEXČEZ

Estimated power prices (EUR)

Source: EEX, PXE, Czech team estimates




CZECHACTUAL ISSUES

16

Development of subsidiary, taxed and bought emission allowances (mil. CZK)

2011E2012E

2013E2014E

2015E2016E

2017E2018E

2019E2020E

12

14

16

18

20

16

2011E2012E

2013E2014E

2015E2016E

2017E2018E

2019E2020E

4569.6 4636.8 40046344.8

9450

11969.9999999999

13964.9999999999

1596017955

19950Emission allowances - gift taxEmission allowances - buy

Estimated prices of emission allowances (EUR)

20002002

20042006

20082010E

2012E2014E

2016E2018E

2020E0

10

20

30

40

50

60

70 Dividend per share (CZK)

Source: Czech team estimates




CZECHSENSITIVITY ANALYSIS

1717

Return on capital

Sales

-4,811 8,889

-766 4,290

Influence of 1% change of the factor to the value

of Equity (mil. CZK)

Dividends Emmision allowances SalesReturn on capital

-9% -5% -2% 0% 2% 5% 9%-100,000

-80,000

-60,000

-40,000

-20,000

0

20,000

40,000

60,000

80,000

100,000 Sensitivity of value to the factor (mil. CZK)

Return on capital SalesEmmision Allowances Dividends





CZECHSENSITIVITY ANALYSIS

1818





485 528 571 613 656 699 742 785 827 870 913 956 999 1041 1084 11270.0%

2.0%

4.0%

6.0%

8.0%

10.0%

12.0%

14.0%

16.0%

18.0%

0.0% 0.5% 1.2%2.1%

4.3%

9.4%

13.2%

15.7% 16.4% 16.1%

10.3%

6.1%

2.6%

1.0% 0.7% 0.4%

Stock price

Prob

abili

ty

-50.00% -40.00% -30.00% -20.00% -10.00% 0.00% 10.00% 20.00% 30.00% 40.00%0.00%

20.00%

40.00%

60.00%

80.00%

100.00%

Probability density

Distribution function

Var 10 %

Continuous yield

Prob

abili

ty

VaR 10%

Mean 802

Variance 10122

Standard deviation 101

Min 487

Max 1126

Percentil VaR CVaR

1% -33,8% -38,8%

5% -20,6% -28,2%

10% -14,6% -22,8%

TEAM E

1919

CZECHSUMMARY

TICKER NYSE

EURONEXT: CEZ

HOLD

TARGET PRICE:

807 CZK

Good stable company with Czech political support

Majority of indexes around industry average or higher

Reasonable financial analysis indicators

Stable production of free cash flow

UNDERVALUED

Necessity of cutting down costs

Uncertainity about allowances

Existing drop in dividends

Investment risks




TEAM E

2020

CZECHSUMMARY




TICKER NYSE

EURONEXT: CEZ

HOLD

TARGET PRICE:

807 CZK


1/7/2010 20/8/2010 9/10/2010 28/11/2010 17/1/2011550

650

750

850

950

1050

1150

Date

CZK

Recommendation to 21 December 2010

TEAM E

TICKER NYSE EURONEXT: CEZ

HOLD

TARGET PRICE: 807 CZK21

CZECHRECOMMENDATION TO DECEMBER 21, 2010




CZECH

APPENDIX

22

Source: Czech team estimates, Company data

CZECHAPPENDIX - HIGHLIGHTS

23

I/2007III/2007V/2007VII/2007IX/2007XI/2007I/2008III/2008V/2008VII/2008IX/2008XI/2008I/2009III/2009V/2009VII/2009IX/2009XI/2009I/2010III/2010V/2010VII/2010IX/2010XI/2010

0200400600800

1000120014001600 CEZ stock price (CZK)

Market profile

52 Week Price Range 950,00 – 736,00

Average Daily Volume 490 953,30

Beta 0,99

Dividend Yield (Estimated) 6,48%

Shares Outstanding 537 989 759

Market Capitalization 415 059

Institutional Holdings 79,86 %

Insider Holdings 0,84%

Book Value per Share 1 018,94CZK

Debt to Total Equity 35%

Return on Equity 21%

Source: Czech team estimates, Company data, Eurostoxx50

CZECHAPPENDIX – INVESTMENT SUMMARY

24

2,010 2,011 2,012 2,013 2,014 2,015 2,016 2,017 2,018 2,019 2,0205,000

55,000

105,000

155,000

FCFE and EBITDA (mil CZK)

FCFE EBITDA

I/2007

III/2007

V/2007

VII/2007

IX/2007

XI/2007

I/2008

III/2008

V/2008

VII/2008

IX/2008

XI/2008

I/2009

III/2009

V/2009

VII/2009

IX/2009

XI/2009

I/2010

III/2010

V/2010

VII/2010

IX/2010

XI/2010

0500

100015002000250030003500400045005000

02004006008001000120014001600

EU50 : CEZ

EU50CEZ

EU50

(EU

R)

CEZ

(CZK

)


CZECHAPPENDIX – STATEMENT OF CASH FLOW

25

2010E 2011E 2012E 2013E 2014E 2015E 2016E 2017E 2018E

EAT 47 163 44 259 42 877 45 790 49 149 50 320 52 861 55 655 58 669

Amortization 22 634 22 860 23 089 23 320 23 553 23 788 23 500 23 500 23 500CASH GENERATED FROM OPERATIONS 69 797 67 119 65 966 69 109 72 702 74 109 76 361 79 155 82 169

CAPEX 67 751 59 610 61 468 45 723 47 706 33 380 35 000 35 000 50 000

∆ Current assets 6 168 774 -456 5 744 8 960 6 319 6 193 6 297 6 564

∆ Current liabilities 7 011 880 -518 6 529 10 185 7 183 7 039 7 158 7 462

∆ Working capital -843 -105 62 -785 -1 225 -863 -847 -860 -897

Financial investments 8 078 3 035 2 300 426 0 0 0 0 0CASH USED IN INVESTING ACTIVITIES 74 986 62 539 63 830 45 363 46 481 32 516 34 153 34 139 49 103

Dividends 28 520 25 940 24 342 23 583 25 184 27 032 27 676 29 073 30 610

Part payment of debts 5 797 5 797 5 797 5 797 5 797 5 797 5 797 5 797 5 797CASH USED IN FINANCING ACTIVITIES 34 317 31 736,51 30 139 29 379 30 981 32 829 33 473 34 870 36 407

DIFFERENCE OF CASH FLOW -39 506 -27 156 -28 003 -5 633 -4 760 8 763 8 734 10145 -3 341

Net debts 39 506 27 157 28 003 5 634 4 760 -8 763 -8 734 -10 146 3 341

Condition of debts 190 519 211 879 234 086 233 922 232 886 218 325 203 794 187 851 185 395

Statement of Cash Flows (in millions CZK)


CZECHAPPENDIX – BALANCE SHEET (ASSETS)

26

Balance Sheet (in millions CZK)2009 2010E 2011E 2012E 2013E 2014E 2015E 2016E 2017E 2018E

ASSETS 530 259 584 179 621 702 659 626 687 773 720 886 736 796 754 489 772 286 805 351

NON-CURRENT ASSETS 414 955 462 707 499 457 537 836 560 239 584 392 593 984 605 484 616 984 643 484

Plant in service 509 618 577 369 636 979 698 447 744 170 791 876 825 256 860 256 895 256 945 256

Less accumulated provision for depreciation 266 377 -289 011 -311 871 -334 960 -358 280 -381 833 -405 621 -429 121 -452 621 -476 121

Net plant in service 243 241 288 358 325 108 363 487 385 890 410 043 419 635 431 135 442 635 469 135

Nuclear fuel, at amortized cost 5 439 6 000 6 000 6 000 6 000 6 000 6 000 6 000 6 000 6 000

Construction work in progress 80 125 80 125 80 125 80 125 80 125 80 125 80 125 80 125 80 125 80 125

Investment in associates and jointventures 17 250 17 400 17 400 17 400 17 400 17 400 17 400 17 400 17 400 17 400

Investments and other financial assets 49 423 50 000 50 000 50 000 50 000 50 000 50 000 50 000 50 000 50 000

Intangible assets, net 18 653 20 000 20 000 20 000 20 000 20 000 20 000 20 000 20 000 20 000

Deferred tax assets 824 824 824 824 824 824 824 824 824 824

CURRENT ASSETS 115 304 121 472 122 246 121 790 127 534 136 494 142 812 149 005 155 302 161 867

Cash and cash equivalents 26 727 38 537 43 258 42 333 47 884 56 429 61 815 67 083 72 449 78 063

Receivables, net 47 347 41000 37000 37500 38000 38500 39000 39500 40000 40500

Materials and supplies, net 4 959 5 224 5 258 5 238 5 485 5 870 6 142 6 408 6 679 6 962

Fossil fuel stocks 2 944 3 101 3 121 3 110 3 256 3 485 3 646 3 804 3 965 4 133

Emission rights 1 212 1 400 1 400 1 400 700 0 0 0 0 0

Other financial assets 29 706 29800 29800 29800 29800 29800 29800 29800 29800 29800

Other current assets 2 409 2 409 2 409 2 409 2 409 2 409 2 409 2 409 2 409 2 409


CZECHAPPENDIX – BALANCE SHEET (LIABILITIES)

27

Balance Sheet (in millions CZK)2009 2010E 2011E 2012E 2013E 2014E 2015E 2016E 2017E 2018E

EQUITY AND LIABILITIES 530 259 584 179 621 702 659 626 687 773 720 886 736 796 754 489 772 286 805 351

TOTAL EQUITY 206 675 219 861 235 146 251 381 273 162 297 127 320 415 345 599 372 181 400 240

Equity attributable to equity holders of the parent 200 361 214 361 229 646 245 881 267 662 291 627 314 915 340 099 366 681 394 740

Stated capital 53 799 53 799 53 799 53 799 53 799 53 799 53 799 53 799 53 799 53 799

Treasury shares -5 151 -4 600 -4 600 -4 600 -4 600 -4 600 -4 600 -4 600 -4 600 -4 600

Retained earnings and other reserves 151 713 165 162 180 447 196 682 218 463 242 428 265 716 290 900 317 482 345 541

Non controlling interests 6 314 5 500 5 500 5 500 5 500 5 500 5 500 5 500 5 500 5 500

TOTAL LIABILITIES 323 584 364 317 386 557 408 245 414 611 423 759 416 382 408 890 400 105 405 111

LONG-TERM LIABILITIES 177 181 211 238 232 598 254 805 254 641 253 605 239 044 224 513 208 570 206 114

Long-term debt, net of current portion 118 921 152 630 173 990 196 197 196 033 194 997 180 436 165 905 149 962 147 506

Accumulated provision for nuclear decommissioning and fuel storage 37 152 37 500 37 500 37 500 37 500 37 500 37 500 37 500 37 500 37 500

Other long-term liabilities 21 108 21 108 21 108 21 108 21 108 21 108 21 108 21 108 21 108 21 108

DEFERRED TAX LIABILITY 15 335 15 000 15 000 15 000 15 000 15 000 15 000 15 000 15 000 15 000

CURRENT LIABILITIES 131 068 138 079 138 959 138 441 144 970 155 155 162 337 169 376 176 535 183 997Short term loans and current portion of long-term debt 37 889 37 889 37 889 37 889 37 889 37 889 37 889 37 889 37 889 37 889

Trade and other payables 78 212 87 670 88 550 88 032 94 561 107 250 116 436 125 077 133 518 142 005

Accurated liabilities 14 967 12 520 12 520 12 520 12 520 10 016 8 013 6 410 5 128 4 103


CZECHAPPENDIX – INCOME STATEMENT

28

Income statement (in millions CZK)2 009 2010E 2011E 2012E 2013E 2014E 2015E 2016E 2017E 2018E

REVENUES 196 352 206 855 208 173 207 397 217 179 232 436 243 196 253 742 264 466 275 644

Sales of electricity 173 494 188 050 189 248 188 543 197 453 211 305 221 088 230 674 240 423 250 585Heat sales and other revenues 22 858 18 805 18 925 18 854 19 744 21 131 22 109 23 067 24 042 25 059

Operating costs 128 153 118 155 116 577 116 142 121 620 130 164 136 190 142 095 148 101 154 361

Gift tax 4 570 4 637

Allowances 4 004 6 345 9 450 11 970 13 965 15 960 OPERATING COSTS AFTER ALLOWANCES

128153 118 155 121 146 120 779 125 624 136 509 145 640 154 065 162 066 170 321

Amortization 22 876 22 634 22 860 23 089 23 320 23 553 23 788 23 500 23 500 23 500 EBITDA 97 075 88 700 87 026 86 618 91 555 95 927 97 556 99 676 102 400 105 323 EBIT 68 199 66 066 64 166 63 529 68 235 72 374 73 768 76 176 78 900 81 823 Interests 3 303 7 841 9 526 10 594 11 704 11 696 11 644 10 916 10 190 9 393 EBT 64 946 58 226 54 640 52 935 56 531 60 678 62 124 65 260 68 710 72 431 Income tax 13 091 11 063 10 382 10 058 10 741 11 529 11 803 12 399 13 055 13 762 EAT 51 855 47 163 44 259 42 877 45 790 49 149 50 320 52 861 55 655 58 669

Dividends 26 899 28 520 25 940 24 342 23 583 25 184 27 032 27 676 29 073 30 610 EAR 24 956 18 642 18 319 18 535 22 207 23 965 23 288 25 185 26 582 28 059


CZECHAPPENDIX – FREE CASH FLOW

29

FCFF 2010E 2011E 2012E 2013E 2014E 2015E 2016E 2017E 2018E

EAT 47 163 44 259 42 877 45 790 49 149 50 320 52 861 55 655 58 669

ODPISY 22 634 22 860 23 089 23 320 23 553 23 788 23 500 23 500 23 500

změna ČPK -843 -106 62 -785 -1 225 -864 -847 -861 -897

INV 67 751 59 610 61 468 45 723 47 706 33 380 35 000 35 000 50 000

úroky 7 841 9 526 10 594 11 704 11 696 11 644 10 916 10 190 9 393

úroky(1-t) 6 351 7 716 8 581 9 480 9 474 9 432 8 842 8 254 7 608

FCFF 9 240 15 331 13 017 33 652 35 695 51 024 51 049 53 270 40 674

FCFE 2 010 2 011 2 012 2 013 2 014 2 015 2 016 2 017 2 018

EAT 47 163 44 259 42 877 45 790 49 149 50 320 52 861 55 655 58 669

Odpisy 22 634 22 860 23 089 23 320 23 553 23 788 23 500 23 500 23 500

ČPK -843 -106 62 -785 -1 225 -864 -847 -861 -897

INV 67 751 59 610 61 468 45 723 47 706 33 380 35 000 35 000 50 000

Saldo U 33 709 21 360 22 206 -163 -1 037 -14 560 -14 531 -15 943 -2 456

FCFE 36 598 28 975 26 642 24 009 25 184 27 032 27 676 29 073 30 610

Free cashflow (in millions CZK)


CZECHAPPENDIX – VALUATION

30

DCF method2 010 2 011 2 012 2 013 2 014 2 015 2 016 2 017 2 018

Free cash flow to the equity 36 598 28 975 26 642 24 009 25 184 27 032 27 676 29 073 30 610

Discounted free cash flow 27266,7 23594,0 20008,4 19751,2 19950,7 19222,1 19002,3

Values in CZK Phase 1 : 2011 - 2018 Phase 2 : 2018 and more

Value od phase 1 148 795 Levered β 0,99 Levered β 0,99

Continuing value (perpetuity) 436 668 Re 6,26% Re 8,50%

Value od phase 2 285 405 Rm 6,29% Rm 6,99%

Total value 434 201 Rf 3,64% Rf 4,00%

Number of issued shares 537989759 CZ/A 32,61% CZ/A 23,02%

Value of share 807,080 E/A 37,64% E/A 49,70%

Counted growth in the second phase was 1,49%

based on planned growth of sales

Source: ČEPS

CZECHAPPENDIX

31

STATE TRANSMISSION SYSTEM PLAN FACT

Germany 50 Hertz Trans. -3720 GWh -1400 GWh

TenneT -4077 GWh -6321 GWh

Poland PSE Operator -726 GWh 5849 GWh

Slovakia SEPS -5229 GWh -5825 GWh

Austria APG -1997 GWh -6599GWh

Czech Republic ČEPS -14297 GWh -14296GWh

Cross-border power flows (2009)

DE - 51,14€/MWh

SK – 49,15€/MWh

HU - 51,05€/MWh

PL – 50,25€/MWh

Source: Comapny data, Czech team estimates

CZECHAPPENDIX

32

EAT/Equity

EBIT/Assets

Revenues/Assets


Equity/Assets

ROE

ROA

ROS

ROC

EBITDA margin

0%

20%

40%

60%

80%

100%

2009 2010

20052007

20092011

20132015

20172019

0%

10%

20%

30%

40%

50% Rentability

ROCROSROEROA

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

2015

2016

2017

2018

2019

2020

0%

20%

40%

60%

80%

100% Financial stabilityTotal In-debtedness

Debt on Equity

Financial In-dependence

Documents

CEZ GROUP 1 INVESTMENT RECOMMENDATION TO DECEMBER 21, 2010 1 CFA INVESTMENT RESEARCH CHALLENGE MARCH 3, 2011 MADRID