CEZ: Wholesale prices to increase by 16.9% y/y in 2007

CEZ announced average wholesale electricity price to grow by 16.87% y/y in 2007, when demand exceed baseload almost 5 times. The second electricity auction showed prices higher by 19.5% y/y (CZK 1,244/MWh or EUR 44.15/MWh), which is lower than Slovakian price of EUR 44-45/MWh and Hungarian EUR 48-50/MWh, but CEZ together with baseload auction offered other products with price increase capped by 10.8%, thus result average price increased by 16,87 % y/y. Note that virtual power plant auction, which took place earlier this month, indicated the price increase by 17.1%. The head of sales Mr. Svoboda said that CZ prices will convert and reach German level probably in 2009. CEZ expect that marker share will lower to 53.4% from the last year’s 56.2% and expect further decline in next years. CEZ also stated that next year production is expected to reach the record level set by year 2003.

Our view:
We believe that conservative growth by 15% was already priced in, so the real increase of 16.87% should be positive for CEZ. Based on the results of the auction we remain positive on the likelihood that domestic prices will converge to EUR 50/MWh by 2009 as we are expecting in our model mainly due to demand growth, falling capacities in the region and freed cross-border capacities. We reiterate our Buy recommendation.