CEZ and Czech Coal group (CC), a mining corporation, have appended their signatures to a contract to finally secure the supply of coal to the Pocerady power plant for a term of up to nearly 50 years. The Pocerady power plant will undergo the first major upgrade project by 2016. That is also the earliest date when CEZ can agree with Czech Coal on the power plant’s sale. The contract foresees another chance to reach such an agreement in 2024. The contract will secure a permanent demand for the brown coal mined by Czech Coal. However, the demand will be a bit lower than in the previous years, and will drop from the current 8.5 million to 5 million tons. The price per 1 GJ has been set at CZK 38.8 for 2013. Until 2023, the price is gradually going to reach 65% of the black-coal price on European exchanges (ARA). This year, this price would be roughly 48 CZK/GJ, CEZ said in its official statement.
Our take:The unveiled price of brown coal as well as other conditions are in-line with previous speculations, therefore should be NEUTRAL for CEZ shares at the moment.
CFO said earlier the contract with Czech Coal (CC) may help to boost guided EBITDA for 2013 of 2 bln CZK as the guidance did not count with full Pocerady output, nevertheless, we assume this should have largely been priced-in.
We estimate CEZ’s cost with external (CC) brown coal deliveries was 2.75 bln. CZK in 2012 for 8.5 bln. tonnes with an estimated price of CZK 31 per GJ. CEZ will depend on Czech Coal deliveries for about 5 tonnes of coal this year. CEZ should thus pay of about 500 mln. CZK more this year due to price increase (i.e. 1.35% of NI) but the total coal costs may decrease in case of probable Chvaletice sale.
We expect Chvaletice could be sold for about 5 bln CZK to people related to Czech Coal group and so 45 CZK dividend may be preserving not only in 2013 but also in 2014 (despite lower earnings outlook for 2013) thanks to one-off gain from the Chvaletice sale.
From the longer-term perspective, a gradual increase to 65% of ARA benchmark price should lead to at the moment – lower, but more predictable earnings margins of Poceradypower plant as ARA is very closely linked to the price of electricity in Germany and, more or less also in the Czech Republic since the German black-coal power plants are most of the time the marginal sources of power that significantly determine the price of electricity. Again, a kind of a trade-off between both parties, therefore NEUTRAL in our view.