CEZ, a. s. (CEZ) Earnings Call Transcript & Summary

Dear ladies and gentlemen, welcome to the conference call of CEZ Group 2019 results. At our customers' request, this conference will be recorded. [Operator Instructions] May I now hand you over to Barbara Seidlová, who will lead you for this conference. Please go ahead, madam.

Hello, everyone, and welcome on today's conference call. As usually, I will introduce today's speakers. Martin Novák, Chief Financial Officer.

Good afternoon. Good morning.

And Pavel Cyrani, Chief Sales and Strategy Officer. And I'm now handing over to Pavel to start the presentation.

Okay. So good afternoon, good morning, ladies and gentlemen. Let me walk you through the first part of the presentation. First of all, before we dive actually to the traditional numbers, let us emphasize that we at CEZ and employees of CEZ are actively working to eliminate to the extent possible the risks caused by the COVID-19. CEZ, as a subject of critical state infrastructure, has developed crisis and emergency preparedness plan already a long time ago, and those also include the risk associated with the spread of contagious diseases. So these are the plans that we are now deploying, and obviously, being this critical state infrastructure in close cooperation with the authorities and the government of the Czech Republic. Already since end of February, we have a special team activated. We have implemented a number of preventive measures that are to prevent the spread of COVID-19, which includes the prohibition of all excursion and unnecessary visits. This was one of the first ones, but now it goes well beyond. We have home office for everybody who can go on home office. We have all the foreign business trips canceled, also all the meetings about 30 people now at this moment since there is a home office for everyone, who is not necessary to be on site. Actually, this -- all the meetings are online meetings. We also do body temperature management, especially at the entrance of our nuclear power plant, but also our call centers. We have closed down our branches for the customer service, and we now take all the -- our customer and consumer requests either online or through call centers. And through that, we have -- we hope to mitigate the risk of COVID-19 to the maximum extent possible. Now let me come to the numbers. If this was not the time of -- that we are now experiencing, a tough time, this will be a very positive news that we have for 2019. The operating revenue increased by 12% year-on-year. The EBITDA increased by 21%, reaching CZK 60.2 billion with the net income increased by almost 40% year-on-year to CZK 14.5 billion without the adjustment and the adjusted net income even more than 40%, 44% year-on-year to CZK 18.9 billion. Some of the highlights of 2019. We have achieved a 64.6 terawatt hours of generation, and more importantly, over 30 terawatt hours from the nuclear power plant. We have won also a record high result from our commodity trading department. We already had a record high last year, and this was even more. So we are CZK 4.9 billion from our commodity trading. We have also updated our strategy, which was approved by the shareholders at a meeting in June, and I'll speak more about that. We are working on our energy services strategy with some new acquisitions that added CZK 0.6 billion to the EBITDA. On the coal side, we did not exercise the option of withdrawal from sale of Pocerady, which means that there is a valid contract of selling the Pocerady brown coal-fired power plant at end of 2023 or 2nd of January 2024. And we have also been working hard on preparing the contract between CEZ and the Czech government that should, on one hand, enable the successful construction of nuclear power plant, but at the same time, it should protect all the kind of value and rights for all the shareholders of CEZ. Now obviously, beyond what we were working on actively at CEZ, the number one impact on the functioning of the energy sector in the long run was the so-called European Green Deal, where -- in which the European Commission defined its targets of achieving climate neutrality by 2050. This will obviously impact all the sectors of economy because climate neutrality secures all the sectors. But obviously, it has a significant impact on the energy sector as such as well. We expect that this Green Deal will materialize and increase decarbonization goal by 2030 from the originally approved 40% to 50% to 55%. And also that it will increase or will be translated into an increased goals for the renewable energy and energy efficiency objectives. With this, we -- this is obviously on the European level, but this all will be also translated into the national plan. The Czech national plan was finished end of last year. But this European Green Deal already foresees that, by 2023, the national plans should be adjusted and should be made more ambitious in terms of renewable generation energy savings. And we believe that, although this is a significant impact on the energy sector, that we will use our skills and experience to translate this into an opportunity for CEZ. The other opportunity will come from the decarbonization of all the other sectors, which typically means that these sectors first needs to be converted to electricity from the traditional fuels. And then this electricity always cannot come from a zero emission sources, renewable, and in the case of Czech Republic, also nuclear. And at the same time, now it appears that the -- this new Green Deal will create a longer-term growth stimulus for the emission allowance price. We obviously see some up and downs in the short term, but we believe that this should be a long-term growth stimulus. And I will share later that this is a good news for just because of the structure of the portfolio that we have with a good emission, low-emission factors. Now this is obviously the Green Deal income out of the blue. This was discussed, and this was already, to a large degree, reflecting in our new strategy that is outlined on Page 5. It has 4 main priorities. One is -- the first one is the efficient operation, our current generation portfolio with the goals of decreasing our CO2 emission factor. The second is modern and some smart grid distribution and digitized customer services. The third pillar being the new energy sector development in Czech. Obviously, Czech was not the fastest in the recent years to continue in the buildup of the renewables and/or the energy services, the efficiency measures. But we believe that this Green Deal will create yet another stimulus and push for these sectors to grow in the Czech, and we hope to be the leaders in the sector in Czech. We plan to be those. And on the energy services, because this is typically a regional customer base, including also the surrounding countries, Germany, Poland and so forth, we intend to develop these on a regional basis and that is the fourth pillar. Now let me reflect briefly on how we progressed since June on fulfilling these ambitions. First is the efficient operation of our energy portfolio. As already mentioned, the nuclear generation exceeded 30 terawatt hours in 2019. And we are working hard in general to increase this number even further. And at the same time, we were able to receive a one-off, which is the nuclear operator association, a confirmation of high standard of operation of Temelín Nuclear Power Plant. At the same time, for the new nuclear development apart from negotiating the contracts with the government, we also worked on developing the project further, and the step that we reached last year was receiving an affirmative standpoint to the environmental impact assessment, which is now valid for 7 years. In terms of the other areas, I already mentioned our decision not to withdraw from the sale Pocerady brown coal-fired power plant. We also are working on, I guess, 2 areas. One is to preparing to shut down the selected coal sources, the older ones whose contribution to the financial result is either 0 at some point even fluctuating below and above 0 given the CO2 crisis, and so basically improving our CO2 emission pact trend at the same time with having no impact on our financial results. And for those that we want to continue operating, we worked on the investments needed to meet the new environmental limits, which will come in 2021 into effect. We also worked on optimization and cost saving in the supporting and central services, and those on the permanent benefits of the measures that we've taken should exceed CZK 0.6 billion a year from now on. I already mentioned that, and I'm now on Page 7, we are in a good position, well geared for the increase in CO2 prices. You see that on the slide on Page 7 that the marginal power plant emission factor in the region, which is basically Germany-driven, is around 650 to 700 grams of CO2 per kilowatt hour or if you want, 0.65 to 0.7 tons per megawatt hour. At this moment, our emission factor is around 361. So already difference between 361 and the margin of power plant emission factor is the increase of our income every time CO2 allowance increases by EUR 1. And we are working on pushing this number even lower. We expect this number to decrease by 72% or 3 quarters almost by 2040. Well, in terms of the other 3 pillars, just a couple of notes because there will be more detail in -- further in the presentation. Obviously, for distribution, the #1 topic is the preparation of the Czech regulatory period, which will start 2021. At this moment, there's no numbers or not -- the rules are -- have not been confirmed yet, but they should be confirmed by the regulatory office in the first half of the year of 2020. We have invested under the current conditions almost CZK 11 billion in the distribution network, obviously, in both areas, maintenance, but also the smartification. In terms of the -- our supply company, it's also doing well, and the number of connection points operated by CEZ per day increased by almost 8,000, and at the same time customer satisfaction increased. In terms of the new energy sector on this one, we are waiting for the national plan to come fully into effect. At this moment, we are preparing the teams for new renewable development in the Czech Republic. We are also developing sites, primarily on the ground that we already own, around our power plant and around our mines, but also third party -- we are securing third-party land to be ready once all the tools are put into effect that we are ready to build. And in terms of the energy services, we are meeting our growth targets in 2019. We have another high-growth target for 2020. I will talk more about it later in the presentation. Also, our Inven Capital made another investment into new, potentially very interesting companies that are developing new technology that will be deployed in the energy sector. We are also working on our divestment strategy because you all know that part of our strategy is also the more focused regional approach, meaning mainly focusing on Czech Republic and the near region around, which means that we have commenced the divestment process of our Romanian assets with 19 nonbinding offers received and selecting down to 9 bidders for the next phase. And we are expecting the binding bids in the second quarter 2000 -- of this year, 2020. On the Bulgarian assets, we have not been able to implement the already signed contract yet because the Bulgarian authorities did not permit it yet. This approval by the Bulgarian authorities is contested at a court, and the court has not made a decision, but we are waiting now for the court. At the same time, we are still working on improving the assets, both in Romania and Bulgaria. One of the numbers here mentioned is the reduction distribution losses, but it's not the only measure to show the improvement. We are also planning on divesting our coal assets in Poland. And this process, we expect to start towards the end of this year. Now in terms of numbers, what to expect 2020. We expect the growth to continue. We expect the EBITDA to reach CZK 63 billion to CZK 65 billion; and the net income adjusted, CZK 21 billion to CZK 23 billion. Both of them driven by growth in 3 areas. One is the conventional or traditional generation of CZK 1 billion to CZK 2 billion growth, driven by the higher realization prices. In terms of the sales segment, we have underlying growth in the energy services and also the standard supply business, which was, to some degree, hidden by the fact that we had to return the payment to the railway operating company here in Czech this year, but it will not be there next year, and that will translate into the growth of CZK 1.5 billion to CZK 2 billion. And we also expect growth in the distribution segment driven by the higher investment and favorable regulatory conditions. Now, obviously, there are some risks and opportunities. As always, we will watch for the availability of the generating facilities, the power plant. We also are not fully hedged, 100%, although we are close to 100%, but not 100% hedged. And unfortunately, we see a drop in the prices, driven, among others, by the situation around COVID-19, so that may translate to some degree into our results. On the other hand, we are always quite conservative on the planning of our profit from trading in commodities. So a good result in the year of 2020 would again translate in exceeding our current guidance as well as a high revenue from ancillary services. And last, but not least, development of the new energy services acquisitions and also standard growth. So with this summary, let me hand over to Martin on a more detailed financial results.

Thank you very much. So I will guide you through our financial results and then move the section with some information about generation from traditional resources, mining and our support activity. So when we look at Slide 11, you can see actually what has been already said that our EBITDA has grown by 21% to CZK 60.2 billion. Net income -- adjusted net income has grown by 44% or CZK 18.9 billion. Selected year-on-year positive factors are definitely higher power prices, higher profit on commodity trading and higher power generation. On negative effects, we had to pay more for carbon credits as we get less and less of those for free. And at the same time, their price obviously went up. Effect of poor decision under which our sales organization had to return CZK 1.3 billion back to railway authority that we are -- where we are actually suing them for electricity that they did not buy although they contracted. So we basically sue them for the difference. We won the case, we got the money. Now we lose the case in the appeal court, which means it will go to further stage of the judicial system. But we had to return CZK 1.3 billion and account for it. So this was a negative effect in 2019. When we look at our financial performance, not only on EBITDA, but also on other metrics like EBIT, net income, adjusted net income, operating cash flow, CapEx, basically everything is growing with double-digit speed, especially the profit numbers, which, as we said last year, would mean that 2018 really was the bottom of our results. Then the second part of the table is actually full of volumetric data, basically, almost everything is growing. What's worth mentioning is growth of 11% in segment of new energy and sales of CZK 2.2 billion versus CZK 2 billion in 2018. Important slide on Page 13, you can actually see year-on-year change in EBITDA. And clearly, from this slide, you can see very explicitly that generation and trading is the key driver of our results improvement, mainly due to higher power prices, partly offset by higher carbon credits. We also had a positive impact from mining activities. Although we mined less coal, we were able to sell it for -- at higher prices and save some cost internally. So CZK 0.5 billion on mining activities. Generation and new energy, CZK 1 billion more, which is coming from provisions for photovoltaic power plants in 2018. So this is that expense we had in 2018, did not have it in 2019. But then the power generation improvement actually in Romania of CZK 300 million is something that helps in 2019. Distribution, higher gross margin from electricity distribution in Czech Republic and Bulgaria. And on the sales side, actually, we had impairment of CZK 600 million versus 2018. A big part of it driven -- basically everything, driven by CZK 1.3 billion of the money we had to pay back to railways, as I already explained. So we compensated more than half of the difference with better margins in our business. Then other income and expenses after EBITDA, depreciation, amortization and impairments are 13% higher, mainly due to higher depreciation because we have more fixed assets in use. And also impact of IFRS 16, where we now account for leases through depreciation. We had higher impairments in relation to Polish assets, Bulgarian assets, Czech assets and Romanian assets compared to 2018. Other income expenses, CZK 1.8 billion higher, mainly due to refund of interest that we got actually from tax authority in 2018, which is CZK 700 million. Again, it was a positive impact in 2018, which we did not -- could not repeat in 2019. So this is half of the difference. And then remaining half is actually primarily due to revelation of financial derivatives. Coming down to actually income. Net income of CZK 14.5 million and net income adjusted CZK 18.9 million. We are also showing those adjustments between net income and adjusted net income, basically impairments of assets and goodwill noncash items, and that's why we actually put them back into net income adjusted, which we use for calculation of our dividend, and it's actually the base for our dividend policy. On generation from traditional resources. In that area, actually, we would like to say -- I would like to say that we improved our power generation or increased by 2%; 5% down in coal power plants, mainly in the Czech Republic and Poland. We had lower generation in Detmarovice power plant, which is -- which had a fire in 2017, I guess, or '18. And actually, the repair work is going on. We have, on the other hand, shorter outages, planned outages, actually shutdowns at Prunérov II and Ledvice 3 Power Plant. We had lower generation in Poland, 13%. We had a little increase in nuclear. So we got about 30 terawatt hours to 30.2. And we had significant increase in other sources, which is actually mainly CCGT plant in Pocerady gas plant, due to the relatively high spot prices and extremely low spot prices of gas. So the spread between sales price and commodities price was favorable, and basically CCGT is running at full speed during not only peak hours, but also -- almost like a basal plant. Existing nuclear facilities news. We fulfill all 112 conditions of our long-term operation plan for Dukovany that is actually required by State Office for Nuclear Safety. We fulfill all the new regulations of New Atomic Act. For example, about 1,800 of our in-house employees and 1,000 subcontractors had to go through security clearance through national security office, so that they can enter actually the nuclear installation, which was pretty time-consuming process, but we made it. As Pavel mentioned, we also went through -- to World Association of Nuclear Operators missions, 1 from Paris center, 1 from London. Actually, all of them are either giving us some areas for improvement, but also pointing out that in some areas we basically achieved towards best practice in especially leadership and headquarters supervision over increase of the security and efficiency levels. Then generation from traditional sources, mining. We had -- we have mined 20 million tons of coal. We also received AR in July 2019 for extending our mining activities by 2035. Conventional generation, we generated 23.4 terawatt hours from lignite and hard coal plant. With hard coal, of course, not generating that much because it was basically out of service. Generation from biomass reached 0.6 terawatt hours; large hydro plants, 2 terawatt hours. CCGT increased its electricity output to 3.7 terawatt hours, which is basically doubling compared to -- double compared to 2018. Heat sector, again, we increased our heat supplies from our heat company. Important slides on savings. There was a company-wide initiative actually in 2019. It still continues. A big part of it is done. I happen to be actually in-charge of this initiative. It's called redesign of our central and support activities. We looked at all headquarter activities, not necessarily only carried out by people who are physically sitting at our headquarter buildings, but also headquarter activities around the group. So all the support services you can think of, about 3,700 jobs were actually reviewed. The goal was to cut it by 15%, 20% -- the cost actually by 15% to 20%. We achieved about 343 positions so far, which is a saving of up to CZK 380 million. We found another CZK 90 million in repeating cost. And in 2020, '21, we have a plan to reduce another 130 to 180 positions in support services, so CZK 140 million to CZK 220 million. So basically, current expected benefit is CZK 0.6 billion to CZK 0.7 billion annually. You can see also positions of which areas of business saved most positions: business portfolio management and strategy, 47%, which was the biggest contributor, but also managing our foreign renewables activities, 31%; marketing and communication, 15% and so on. So that's a cost-saving initiative. Then generation from traditional sources in 2020 is expected to grow to 63 terawatt hours, so very slight growth, by 1%. We would like to increase our output at coal plants by about 1%, so basically keeping it flat. Same for nuclear, 30.1 terawatt hours, very similar to 2019. And we plan another 9% in -- to add another 9% in segment Other, this time, mainly coming from increased pumping cycle efficiency at Dalešice hydro power plant, which is a pump plant. So we would expect that we will get more power from that plant. Electricity prices, overview. The prices have been stable pretty much for entire 2019, oscillating between -- or around EUR 50 per megawatt hour. You can see actually the chart between January 2 and February 28. However, now the prices are below EUR 40, so they are definitely not at the levels where we saw them a year ago or in the summer this year, above EUR 50. You can see also big events that actually, the drivers for moving the power prices. On the next slide, you can see actually the reasons why the power prices have dropped between 2nd of January 2019, and end of February. The drop is about EUR 7; at some point, EUR 8, and it is driven by a decrease in coal prices, big part, half of it gas price decrease from EUR 18 to EUR 14 per megawatt hour and carbon prices decrease as well, from 27% to 24%. These days, inflation is a bit different. I think power prices are now below EUR 40, and carbon credits also went down below EUR 20 actually. So now the power prices are around actually EUR 37. But many things these days are actually in -- on different levels compared to the end of February. Last slide from this part of the presentation, it's our hedged volume. For 2020, and this is as of December 31, we were basically hedged 86% at a level of EUR 43.6. For entire 2020, our expectation, that is today's expectation, 17th of March, is that we should end up at average achieved price of EUR 45, mainly due to higher peak prices than baseload prices. So we think that we will be able to move the average achieved price to EUR 45 for 2020. And then EUR 45.7 for 2021, growing to EUR 47.7, 2022. You can also see average carbon prices that is actually -- and the level of hedges that we have for carbon. So that's all for me. And now I will hand over to Pavel, who will guide you through sales, renewable generation and distribution.

Okay. Martin, thank you. I'll make it fast, because I mentioned any other topics in the summary. So first of all, the record high profit from the commodity trading of CZK 4.9 billion compared to around CZK 3.0 billion last year, so at 63% year-on-year growth. We just -- to demonstrate it or to show how much it is we traded 740 terawatt hours of electricity, which is more than 10x the country consumption of the Czech Republic for a full year. And obviously, we are continuing kind of having a good start into the trading in 2020 again. In terms of the supply business, which is done under CEZ per day. Also, I successfully already mentioned the growth in the number of customers or connection points. We are also working on making the customer service to be based on more online, both to increase the customer satisfaction and also to cut costs in the long run. Obviously, now when we have to shut down our branches, it's also an important tool for the customers to be able to raise their requests. We are also working on the supply of non-commodity products, if you will, so that's not electricity, not gas, but rather services and products. We are one of the leaders in the roof photovoltaic installation, also battery systems. We are increasing our heat pump supply. And also, we are one of the largest virtual mobile operators with 125,000 customers. So overall, trying to take care of all the new tower customers. Now in the -- on Page 27 and Page 28, the energy services in the region, we grew the revenues by almost 40% to CZK 21.8 billion across all the regions, Germany, Czech and Slovakia, and Poland and Romania, while maintaining our EBITDA margin. And we plan to achieve another 20% growth to almost CZK 26 billion in the revenues this year. Obviously, there are this big long-term push for the energy services demand, driven by the efficiency targets. At the same time, there might be a short-term effect of COVID-19 on all the business activities, and those are not excluded. In terms of the renewable generation, we have an 11% increase. The 5 and 7 percentage points in Germany and Romania are driven by better weather conditions. In the Czech, this is more a reporting topic where we included our CHP unit fully in consolidation, driven by changes in the shareholders agreement with our minority shareholder, and that drove the 25% increase. In terms of other events, on Page 30. In Poland, where the support for the new renewable is actually picking up, we were able to win a Contract for Difference for 15 years power project in Krasin. So that's a good news. We are obviously in the process of divesting in some of our activities in Poland, but that -- this win will increase the value, we will be able to derive from divestment from the sale. When we are able to collect cash from our foreign investments, we do it. And that was the case last year in Romania, where the company's, Tomis Team and Ovidiu Development, which hold Fântânele-Cogealac farm paid to their shareholders and to the CEZ headquarter CZK 2.5 billion in proceeds. And the others are example of our development, both with batteries and Inven Capital, but I already mentioned those. Now distribution on Page 31, I mentioned the fifth regulatory period already and the investment. On top of the investments that we put into and the electricity network also burning up optical network, optical cables, we added another 400 kilometers last year, and we continue in this work. We have also invested in the online services or online communication channels, which are exactly important in case there is either a calamity driven by, for example, wind and weather or situation like we are experiencing now when physical contact is not recommended. That's on distribution. Now Page 32 on the divestment, which obviously is a topic that we are now also working on hardly or strongly rather. Now in terms of Romania, we launched divestment process in September and we are now providing information to the 9 selected bidders after the nonbinding phase with the expectation to receive binding bid in the second quarter of 2020, so in a couple of months. In the morning, we got a lot of questions to what degree this will be impacted by COVID-19. Obviously, at this moment, it's very hard to say, but the work is continuing, and it's not in a person-to-person meeting, but rather going online, and we are supplying data to the potential bidders and we are working hard on doing their evaluations. So at this moment, we are not changing the schedule. We still expect the binding bids to come the second quarter of this year, and the SPA to be signed in the second half of the year. We'll see if the measures will get even more stricter, whether or not we'll need to adjust the time schedule. In terms of Bulgaria, already mentioned that everything is basically agreed between the 2 parties, us and Eurohold, and we are expecting -- or we're hoping for the approval by the Bulgarian authorities, which didn't award it at first. Now this is being contested. The court had a hearing on March 9. It was adjourned. And it will continue April 6. So that should give us a better clarity than after April 6 on where we stand, and we will be able to conclude this transaction. I already mentioned Poland, and now there's no news for Turkey. Yes, we expect slight growth in the renewable generation issues. See on Page 33, it's mainly driven by the weather. It's not that we would necessarily predict the exact weather of 2020, but we always plan for the median weather based on long-term averages, and 2019 compared to long-term averages was below the average. So if the long-term average would prevail, we should see an almost 10% increase in the renewable generation. And this concludes our presentation, so I just -- if I quickly summarize, I think we have been able to put our new strategy in place with very good results of 2019 and a growth expectation for 2020, which we have significantly under control through our dripping strategy and also through other measures. And we are well geared for the European Green Deal for the long term. The exact effect of COVID-19 is to be seen, and we hope it will be actually a minimum. And thank you. With this, Barbara, back to you.

Yes. So we are ready to take questions.

[Operator Instructions] The first question is from Wanda Serwinowska of Crédit Suisse.

Wanda Serwinowska, Crédit Suisse. Two questions for me. The first one is on the average realization price. You said you expect EUR 45 this year. Would you be able to say if there is any trading profit included? Or is it pure hedging plus mark-to-market for the remaining unhedged volumes? What was the price in 2019? It would be helpful if you could disclose it. And also, would you be able to disclose the most recent hedging? I mean given that you were happy to disclose the price for 2020. Any guidance on 2021 or 2022? And the second question is a quick one. Is there any update on the renewable strategy?

So I will answer.

Okay. Well...

Yes. Pavel?

Yes. Go ahead, Martin.

Okay. So I'll answer. You asked about average price for 2019. I think it is below EUR 40 per megawatt hour, something like EUR 38. So compared to EUR 45, you can actually calculate, and it makes by how much more we could make and we will make. We have to also subtract higher carbon prices. So at the end -- and trading, we had extraordinary trading results. As Pavel said, we don't budget for it because this was the first time we have such a level of trading. So we are more conservative. We don't think we will be able to repeat it every year. But if yes, we'll be very happy. But normally, you wouldn't budget for it. So there is about, I think, CZK 3 billion less budgeted in our trading activities. So 2019 is EUR 38. 2021 and '22 prices, so far, you can see where they are today. And of course, we are selling straightforward at current prices. So if current prices are lower than the average achieved prices here, it will probably mean that they would be somewhat declining. Of course, the position for 2021 was 57% closed as of December 31. Now, of course, obviously, we already sold some volume between 1st of January and today. We are basically selling straight line, so there is -- I really can't tell you how much more. We are actually sold out. I don't have the number here, but it's a straight-line sale. So basically, 2021 will be about 90% sold out by the end of this year, and the curves will be very similar for 2022. It will be about 60% sold at the end of this year, and so on and so. So with current lower prices, average electricity prices would be probably going down. On the other hand, we would also have to see what will happen with carbon credit. Today, they are also a little bit under pressure. So that's for me.

If I just -- if I add on what Martin said, just clarify the prop trading effect is not included in the prices for the EUR 38 and EUR 45. So it comes on top. So that's one point. And second point that I would like to maybe highlight for your attention is that we were used to using EEX, that means the German price, as the -- like pool proxy or exact proxy for the Czech prices. Now this is not -- this is stopping to be the case, driven by the fact that there is more and more hours in Germany with basically 0 price, where the border between Germany and Czech fills up from the other side that we were -- than we have been used to historically. So that is -- there is electricity flowing from Germany to this region, Czech Republic and further on. And at some point, the capacity on the border stops, which basically -- and at the same time, there is electricity shortage in the Balkans, which kind of sucks out, if you will, the electricity from our region, which, in effect, means that the Czech price is, over time, getting higher and higher on average than the German price. So even as Martin mentioned that the German base load price was around EUR 37 when I looked last night for 2021 baseload, at the same time, the Czech price was EUR 42.6. So there was a EUR 5 differential. So even with the low prices in Germany, we are not that much below compared to how we are hedged for the 2021 and on year. So the number is probably not growing now on average, but it's stagnating, but it is not being pulled down that much. At the same time...

Can I have 2 follow-ups.

We hold -- yes, just 2 more sentences. We hope that the very low prices that we see today, which is a combination of COVID-19 and the fight over oil price will, actually, going to prevail. And the economic stimulus packages that governments are preparing will actually translate into a renewed economic activity and a more standard electricity prices.

Can I have 2 follow-ups?

Yes.

So if you believe that high and low power prices will -- are not sustainable, would you consider not hedging as much as you used to do? So just postpone it in order to get a higher power price -- achieved power price by a few months or by a few quarters. And the second question, you mentioned EUR 5 per megawatt hour premium. Is it something sustainable? Is it something that we can put into our models or EUR 1 or EUR 2? Could you please help us?

What I will do...

Or is it just too early to say because it's...

I'll answer the first question, especially when the power prices went relatively significantly up. There were many people asking, why don't you actually speed up hedging when it went up from EUR 20 to EUR 40. Everybody was saying, well, that's the peak, we must sell it all. So we went actually through a study with one of the consulting firms, looked at about 10 companies in our region who have similar profile, are on a similar market. And basically in the 5x horizon -- historical horizon, nobody was able to beat the market when they were trying to speculate with the big volume. So we confirm that our strategy of selling electricity, the baseload on a straight-line basis without speculating, without thinking that now the price is too low or too high, seems to be the best strategy. And maybe EUR 37 or EUR 40, whatever is the bottom, but maybe it isn't. Maybe now slowing down with our sales might mean that we will sell it 6 months later at even lower levels. So that's the hedging strategy, that's what it is. And to gain some more money -- and last year, we actually gained a lot of money. On our point of view, it's actually a job of prop trading that was very, very successful last year. And that's the area where we can afford to speculate and actually put our mind and point of view at work. So that's the first question. Second question, I probably...

And on the sustainability, overall, we believe that this trend is kind of prevailing in terms of the spread, if you were between Czech and Germany. At the same time, it is too short now to confirm or guess whether it is the current EUR 5 or if it will be lower in the long term. I think the -- I would not take the current price at the face value. I just wanted to kind of point out the situation that is happening more and more often to your attention.

The next question is from the Elchin Mammadov of Bloomberg Intelligence.

I have 2 questions, please. The first one is on the coal output guidance for next year. You expect a slight improvement year-over-year. I was wondering why given the deterioration of dark spreads. I mean, you did mention the widening spread between the power prices in Germany and Czech Republic. Is it the main reason why? Or is there something else? The second question is on your supply business. Obviously, you won't have the negative one-offs for railway decision in 2020. But do you expect coronavirus to have any impact on your margins and volumes in the retail business? And again, just sticking with the retail business. Is there any indication of the potential government intervention in terms of tariff freezes and whatnot on the back of it?

So I'll answer the first question. Our core output would -- basically, none of our plans has an issue with not being profitable at even much lower power prices or dark spreads. So all our power plants are in the money given the fact that the lignite plants are sold -- their output is actually sold through hedging activities. CCGT, we don't hedge CCGT. We really use daily opportunity. It doesn't look like there should be any issue so far with the current setup of gas prices and CO2. So we won't -- and nuclear power plants, again, baseload funds with our output basically sold out with very low variable cost, not impacted by the move of commodities or CO2. So I wouldn't expect any significant -- any change, basically, other than for technical reasons in our power output. Supply business, I guess, Pavel?

Yes. And when I now speak about supply, it includes both the supply of commodities and the energy services as such. Obviously, the exact effect is to be seen but -- and it will not be driven by the next 6 to 8 weeks, but it will rather be driven what happens after. If the government come in as they announce now with economic stimulus packages, the effect could be close to 0. If obviously this would turn into a broader economic slowdown, this could have a more significant impact. So I think we'll be smarter on this one after first quarter.

The next question is from Robert Maj of IPOPEMA Securities.

A few questions from my side. First, on Slide #7, you mentioned here the marginal power plant as an emission factor, 650 to 700 grams CO2 per kilowatt hours. Can you say what kind of marginal power plant and specifically do you mean, as on the slide, is it like a German one? Is it a C region? Is it a Czech one? That's number one question. Then the question on the fourth quarter results in the sales segment, it was pretty high at CZK 1.8 billion of EBITDA. I just wonder what -- how is it -- how sustainable is this result going forward on a quarterly basis? And what kind of EBITDA of the sales segment should we see in 2020 and knowing that you expect EBITDA of the full group going now to CZK 63 billion to CZK 65 billion. And also as another question on the ESCO business. On Slide 28, you showed that the revenues you expect in 2020 to go up to almost CZK 26 billion. Where exactly does ESCO business sits in each segment? Is it like the sales? Is it the new energy? And what kind of EBITDA margin do you see in 2020 on ESCO, in particular, on these numbers? And what kind of EBITDA margin was in 2019?

So maybe I can answer the first question. Marginal plan is definitely hard coal plants these days in Germany because we are a price taker from Germany, although there is now a spread within Czech and German price, but still on the margin plant. This is the German hard coal plant, right, Pavel? If you can comment on it.

Yes, that's true. It's like -- it's the virtue for very high efficiency, like the standard hard coal station is about 0.7, 0.8. So this is a combination of a very high efficient coal station/low efficient gas station. Okay. Well, in terms of the sales business, if you would like to see our prediction, there is a more detailed slide on page 42, where you see that we expect on the sales side, CZK 1.5 billion to CZK 2 billion increase compared to today. I would not take the fourth quarter in the supply business on average as something that you can multiply by 4. There are 2 areas. One is the ESCO business, where the thing that you could kind of multiply is the effect of new acquisitions coming in only towards the second half of the year, which then are only in the fourth quarter and were not in the quarters before. But at the same time, given the nature of this energy services business, you typically supply the services throughout the year. You obviously do look for some work in progress, but only to some degree, and then you do the invoicing, mostly in the fourth quarter. This is simply how the business works. So that's one thing that you cannot simply multiply by 4. And in the kind of household supply business, there is always some true-up for the non-invoice, but supplies electricity, which -- as we only invoice all the customers once a year. And we do it basically like gradually throughout the year, some customers in January, some and so forth. We basically estimate at the end of the year, the supplied but not invoiced electricity. And this typically creates some one-offs in a positive, some one-off revenue, one-off margin adjustments -- positive adjustment, which again, you cannot really multiply. So I think I would take this plus 1.8 year-on-year comparison for our guidance as something that you can use in your models. And in terms of the EBIT -- sorry, just one. In terms of the EBITDA margin, we basically have an EBITDA margin between 5% and 6% on average, and this is something that we also count on in 2020, this year. Over time, as we put more focus -- let's focus on the extensive growth and we also kind of develop the companies internally, we hope to push the EBITDA margin to the 6% to 7% area. But this will come later. Now we still have a pretty extensive growth for next year, so 5% to 6% is a good estimate of the EBITDA margin next year -- this year, 2020.

Okay. One more question from my side. You mentioned Green Deal that, over the long term, is likely to push up the CO2 prices. Do you have any -- your own in-house estimate of the CO2 price over the last -- in 2020 or in the years ahead, including the impact of the Green Deal, obviously.

We obviously make a scenario of estimate, and it's always easier to make estimates for the long term rather than for the next year because the next year is impacted by a number of things. And typically, the Green Deal may be the last thing impacting the next year or the year 2020 in comparison to things like COVID-19. So it's very difficult to say how exactly will the CO2 develop, but we believe that to achieve [Technical Difficulty]

We lost the connection to the speaker.

Okay. So let's move to the next question. And when Pavel dials in, he can finish -- come back to the CO2 price.

Okay. Then the next question is from Arthur Sitbon of Morgan Stanley.

The first one is would it be possible to remind us the sensitivity of your networks business to changes in volumes? And well, I asked the question because of the potential impact from the coronavirus on distributed volumes for the next few months. And my second question is if you could provide an update on the discussions regarding new nuclear in Czech Republic and whether or not, again, the situation if the virus would put on post the current discussions?

And just for the record, I dropped out for a minute. I'm back, Pavel Cyrani speaking. So I'm back in, back online.

Okay. So Pavel, I will repeat the questions. I'll answer the first one. And the first is sensitivity of our distribution network, if I understood correctly, to lower distributed volumes. Of course, we would -- if we distribute lower volume, we will get less money in. However, it will be compensated in 2022. So audited in 2021, compensated in 2022 by the regulator, which is a normal way that those things are happening. So we basically have a certain amount of allowed revenue. If it is lower, we will get it compensated through higher tariffs. Two years later, if it is higher, we have to reduce tariff to compensate for it, so-called compensation factor. Another -- second question was actually about our coronavirus effect on new nuclear project. Pavel is in charge of the new nuclear project. However, it doesn't look like coronavirus would have any impact on this project in the phase stage where it is today. So that's all I can say now.

So the plan to conclude the contracts with the government this year and launch a tender of this year is still valid. And obviously, it may take now some delay like 1, 2 weeks as the government is tackling other issues, but it should not have an impact in terms of like months or quarters postponement.

And Pavel, maybe do you want to finish your answer on the CO2 price expectations? Or...

Yes. Well, I wanted to use the fact that I -- my line dropped out that I would avoid making the prediction. No, just -- no, jokes aside, it's very difficult to predict, but we are quite sure if the CO2 reduction should go according to the plan of the Green Deal and if CO2 prices will be the tool to achieve it as it now seems it should be that there should be a significant push beyond the current 25 if I now eliminated the -- just the recent drop caused by COVID-19.

[Operator Instructions] Okay, we have the next question from Mr. Bartek of Erste Group.

One question on the disposals of assets, specifically, Romania. Can you just repeat the use of the proceeds, how much of it would be used for dividends, with only the accounting gain or if we can already expect a higher dividend? And if it's -- not from -- you see now whether it would be in the next year or rather in 2022?

And also, of course, the level of profit. I wouldn't really think there will be any huge profit -- accounting profit coming from sale of assets as more or less they are actually at a level at which we would expect them to be sold that means the Bulgaria. With Romania, we will see how the final price bidding will end up. Yes, we will receive some cash flow. On the other hand, our EBITDA would be somewhat reduced after disposal of those assets. So our debt capacity would be lower. So part of the money would definitely need to be -- we would need to keep them to maintain our rating at the level where it is today. And of course, then it all depends on any new investment opportunities we might have in ESCO services, for example, and so on. And as it was said, yes, there might be a potential for higher dividend. But so far, we -- it's too early to speak about it because we really don't know how things will turn out.

The next question is a follow-up from Robert Maj of IPOPEMA Securities.

Yes. Another question on free CO2 in 2020 and beyond. Could you say what kind of number is that for the free CO2 allowances?

Well, for 2020, we are already -- we are now already receiving free CO2 allowances, so 0.

And do you expect to get any free CO2 from the next ETS scheme, which is running from 2021?

No, it's -- what it looks like is that the -- if you -- if I just remind you, we did not really receive free CO2 allowances in the sense that we will just receive them and that's it. We received them to make investments into decreasing the CO2 emissions from our stations. We use them for renovating some of our stations, building up more efficient boilers and so forth. Now we -- and the discussion is that the CO2 allowances would be used for the same thing. But at this moment, the only -- not the only, but investments that would qualify for it would be either buildup of renewable and -- or it would be used for improving the efficiency of centralized heating as kind of 2 main areas. And so this is when we are preparing plans for renewable buildup. We expect that this would be partially supported exactly from the fund that is from CO2 allowances proceeds.

So the next question is from Jan Raška of Fio Banka.

I would like to ask you on production from nuclear plants for this year. You are planning only stable production year-on-year. So why you are so conservative for this year? I think it's a little bit conservative in my opinion because I think the potential production can be close or more than 31 terawatt hours.

Well, I think it is -- this can be fairly easily planned because we know when and how and how long could the shutdowns -- plant shutdowns will take, and that's basically a function of maintenance shutdowns. So that's really what we would expect.

If there are no questions, I hand back to the speakers for the conclusion.

So thank you, everyone, for listening in. And if you have some follow-up, please do not hesitate to contact the Investor Relations. Thank you, and bye-bye.

Goodbye.

Goodbye. Thank you.

Ladies and gentlemen, thank you for your attendance. This call has been concluded. You may disconnect now.