ČEZ profits dip in first half of year

Falling electricity prices have lagged behind the worst of the recession, but the effect finally caught up with energy company ČEZ, whose net income was down 6.5 billion Kč ($336.4 million) on the year to 28.7 billion Kč in the first half of 2010.

Analysts and even company executives largely expected the news, which did little to sway markets since the results came as little surprise.

"The wholesale price did fall sharply because of the economic recession in 2009, but in view of the fact that we successfully secured electricity sales in a year to three-year advance, the actual prices actually fell by a lesser extent and with delay," said ČEZ CEO and Chairman of the Board Martin Roman.

Despite the drop in wholesale prices, demand bolstered sales as did subsidiary Skupina ČEZ's acquisition of Albanian distribution company OSSh.

In the first half of 2010, demand for electricity was up 4.3 percent on the year, according to ČEZ. Industrial customers' demand was up 5.6 percent. Higher demand for electricity is a "long-term" indicator for a recovering economy, said ČEZ Sales Director Alan Svoboda.

"The increase in demand for electricity has been caused by the recovery of economic growth, whereas household consumption growth was due to higher consumption for heating in this year's longer heating season," he said. The demand is an indicator for "the so-called 'gray' economy, and what applies in the long term is that it is growing at a rate of about 0.6 times the growth of GDP."

Both the company and analysts are keeping forecasts unchanged, even if the company's expectation "seems to be quite a challenging target on the EBITDA [earnings before interest, taxes, depreciation and amortization]," said Marek Hatlapatka, head of research at the Cyrrus brokerage firm.

The EBIDTA for the first half of 2010 reached 47.2 billion Kč, down 9 percent on the year, and the firm maintained its projected full-year EBITDA at 88.7 billion Kč and net income at 46.7 billion Kč.

In Atlantik FT's analysis of the ČEZ results, the brokerage firm also left its full-year forecast unchanged at 89.2 billion Kč, noting speculations that the solar boom would have had a more detrimental effect on the company's earnings.

"The company confirmed its 2010 expectations, which we consider important as we were aware of some speculations about a potential guidance change due to the impact of the solar energy boom on the company's earnings," Atlantik FT's analysis stated.

Under the Czech Republic's current legislation, energy suppliers are required to buy a set amount of renewable energy at prices set by the state. Typically, energy companies pass those high costs on to consumers through "distribution charges." The distribution charges are calculated and set by the energy regulatory body well in advance. In 2009, the solar boom well exceeded anyone's expectations, and therefore the distribution charges weren't set at a rate that offset the amount ČEZ has had to buy in 2010.

"Because of the extreme boom of solar plants this year, the costs for ČEZ are estimated to be much higher than expected by the regulator last year," Hatlapatka said.

The company will be making up for that disparity, however, beginning in 2012, said Milan Vaníček of Atlantik FT.

"In fact, it won't have such a big effect on the company itself at the end of the cycle, but rather on the consumer, as the higher prices are shifted toward consumers. ČEZ will get back its money for solar electricity this year from consumers in 2012," he said.

The company's two nuclear power plants, Temelín and Dukovany, increased output 0.9 percent in the first half of the year compared with 2009. Coal-fired plants produced 0.3 Twh less this year and renewables sources produced 0.3 Twh more, a 24 percent increase. Overall energy output was up 0.8 Twh, or 2.6 percent.

Looking ahead, ČEZ's results will only improve as the economy begins to pick back up, analysts said.

"I assume the second half of the year will not bring any new issues in the core business, as the pricing is given, and therefore only the volume sold is unknown," Vaníček said. "The economic revival plays the biggest role. We expect some moderate growth in the economy. The company also reiterated that its forecast for 2010 could be hurt only by the solar plant issue."

Claire Compton can be reached at
ccompton@praguepost.com