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

Dear ladies and gentlemen, welcome to the conference call of CEZ Group regarding the Q1 to Q3 2020 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 through this conference. Please go ahead.

Hello, everyone, and welcome on our regular quarter call. As usual, Martin Novák, the Chief Financial Officer; and Pavel Cyrani, Chief Commercial and Strategy Officer, will go through the presentation, which will be followed by Q&A. Now I'm handing over to Martin.

Good afternoon. Good morning, everybody. So let me start with the financial part. And I'll start immediately on Page 3, which shows our overall numbers, meaning our -- mainly our EBITDA that has grown by CZK 6.2 billion to CZK 50.9 billion or 14% increase year-on-year. Our net adjusted income has grown by 27% to CZK 18.7 billion. Operating cash flow is following this pattern with a growth by CZK 11.5 billion or 28% year-on-year. That's basically for the financial results on the very top level. Now actually on Slide #4, you can see EBITDA change compared to 2019 3 quarters. And we have actually split EBITDA into 2 parts, as we are in the process of divesting our Romanian, Bulgarian and Polish assets. We would like to show you actually an impact of how much EBITDA is actually attributed to those assets that are being disposed and to those that are so-called strategic assets that we are going to keep. So our EBITDA has overall moved from CZK 44.7 billion to CZK 50.9 billion. And as I said, which is a change of CZK 4.6 billion on strategic assets and CZK 1.6 billion on the assets that we are disposing. The main drivers are actually negative items coming from mining, which is the first column where we had much lower demand for coal this year, partly due to COVID, partly due to shutdown of 1 of our plants and longer maintenance of other lignite plants. Then generation traditional outside Poland, CZK 4.6 billion positive. It's mainly due to higher power prices, due to better results of our trading activities, partly offset by higher carbon cost. And then what's important to say sales segment, CZK 1.5 billion, better than last year. This is mainly coming from the fact that, in 2019, we actually had to pay back the money that was paid to us by railway authority for the electricity that they ordered, but didn't buy, and we actually sold it at a loss. We won a lawsuit, got the money from them, but then lost at appeal court and had to return the money back in 2019, which was a negative effect back then. Now we did not have this effect. So this is actually part of the positive change in 2020. Looking at next slide, you can see actually all items below EBITDA. What's worth mentioning is depreciation, amortization and impairment. There is a growth of 23% or CZK 5.2 billion. Vast majority is actually attributable to higher impairments of assets, mainly goodwill. CZK 2 billion in Poland, and it's related to narrower coal spread, meaning the difference between power price and cost of coal and carbon credit. This is actually impacting our Polish operation. So we have to do impairment of CZK 2 billion. In Romania, some impairment on distribution and on grade CZK 1.4 billion in renewables. Czech Republic, CZK 1.1 billion, mainly, again, asset related to coal, meaning coal mining company and hard coal plant, Detmarovice. That's basically the difference. And that also shows actually that's the main key driver between actually net income of CZK 13.6 billion and adjusted net income, CZK 18.7 billion. Those CZK 5.1 billion are actually those noncash items that we kind of adjust back and don't use them as a basis of calculation of dividend. So basically, we use the higher out of those 2 incomes for dividend distribution. On the next slide, actually, I will hand over to Pavel Cyrani, who will guide you through following part of this section of the presentation.

Okay. Thank you, Martin. There's some business highlights both from within CEZ internal as well as what's happening on the energy market. You're probably familiar with the fact that although the current 2030 targets have been approved basically just recently, there is already a discussion with the new commission on a new proposal, which would increase the targets across the board, both or -- all for CO2, going up to 55% decrease by 2030, whereas renewable should increase up to 39% and energy sales to 40%. We are basically taking this as a fact to the point that we position our -- all businesses to be not only compliant, but actually benefit from these trends. So as you will see later, we are trying to -- we are making sure that our emission factor from our generation is well below the market average, so that the company benefits from CO2 price increases. We're also getting ready for a new wave of renewable construction in Czech as for the second target in our energy services businesses. Although now with COVID, the ones that are mostly hit by the COVID lockdown measures but are well positioned for the efficiency investments that will be necessary to achieve this 40%. So just to give you an overview. The Page 7 shows the fact that the Commission -- European Commission is not coming only with a stake, but also with a carrot, the carrot in the form of all kinds of funds. So a multibillion euro funds should be available. There is still only discussion on the actual measures, so we cannot draw the money yet. But first money should be available to companies, at least in the Czech Republic, already next year with first programs announced. And among others, for example, renewable development in Czech should be funded not through auction, but rather through Modernization Fund, which is one of the funds introduced on Page 7, but there are a number of others. And we are already now working with a long list of projects which we prepare and as the programs will be announced. So we will make everything we can to draw the money from these plans. Now what's happening inside CEZ? As you probably already read, and we already announced, we have accelerated the sale of the Pocerady power plant by 3 years, given the fact that last year we decided not to use the option to cancel the sale, which should happen January 2, 2024. We decided that we don't want the hedging Pocerady power plant in our portfolio. Now this accelerated sale is coming with several conditions or opportunities, measures. One is, we will still use all the electricity or the equivalent of the electricity generated by Pocerady power plant. It's now turned into a future contract, physical contract, but not linked directly to Pocerady. So we will have an opportunity to drive contract of 5-terawatt hour per year until 2023, which will be matched and used to supply our forward hedged sales that we've made on the power plant. We will also -- part of negotiation was also an increased price. So rather than CZK 2 billion, we will receive CZK 2.5 billion for the power plant. And obviously, we will avoid all the operational risks linked to the fact that power plant is: number one, aging; number two, somehow needs to get ready for the strengthened BAT and BREF limits, which apply already from mid-2021. Not to be confused, we will still retain the recently built CCGT station in the -- on the site, 880 megawatts. We will also retain the feeder supplying the raw water and will also retain land on that site to be used for any kind of generation development that would make sense for us in the location. I think this -- some of the highlights also mentioned on the next page, Page 9. Obviously, Pocerady is one of the oldest stations that have not been renovated or upgraded. So with the lowest efficiency and has with the highest emission factory. So this is something that we will eliminate from our portfolio and will eliminate the risks related to the environmental regulatory requirements going further. Now on Page 10, there's -- and also the following pages, there's some updates on our divestment processes. I think they have been discussed quite a lot during the day and also when we first announced the signature. So we have sold the Romania assets to a London-based infrastructure fund, Macquarie. And the transaction is still subject to the approval of the regulatory bodies, EU Directorate-General for Competition and Romanian Supreme Council of National Defense. But we believe that they should not object, and the transaction is expected to be settled during 2021. Now Page 11, I don't have to go through in detail. We announced as a part of our strategy that we will withdraw from the kind of Eastern part of Europe, Romania, Bulgaria, if possible, eventually, also Turkey before they left Albania. We want to take this -- leave these markets. We want to focus more on Central and rather Central Western Europe, if anything. We mentioned several times that we see opportunities coming up in our main market, Czech Republic, especially with the new wave of renewables and also with kind of the efficiency targets. And then we also -- for the part of further distribution development, we intend to increase the investments going into distribution assets, right. In the fifth regulatory period, we see kind of a good return on -- in the investments put in the modernization of the distribution grade. Now on Page 12, there are quick updates on the other markets, which we -- and other assets, which we've marked for divesting. Bulgaria, after some time of not being able to get the required regulatory permissions in Bulgaria, we did receive the first of the 2 needed on October 29, which is the Commission for Protection of Competition, notwithstanding one more by the Bulgarian energy regulatory authority. But if that would go kind of by the law in the sense what are the time lines for these approvals, and we don't see a reason -- a business reason why this approval should not be granted, then we could see this approval happening in kind of end of Q1 or begin of Q2 of next year, hopefully. In Poland, in general, in Poland, we do want to stay in Poland for the energy services activities, but we are ready to divest the coal-fired plants in Chorzów and Skawina. And we do see interest in these, and we'll continue with the process during next year. In terms of the Czech assets, I think we've -- as you see on Page 13, we have stabilized the generation from our nuclear power plants, around 30 terawatt hours. We are still aiming to be above 31%. This is a part of our plan. And now as a part of this plan, we were able to achieve the capacity increase of Temelín Unit 2 by 4 megawatts. These things yet -- although they are small, obviously, with zero-emission and basically very low additional CapEx. These are nice additions to the -- both the low carbon generation and the cash flow coming from the nuclear power plant. A couple of highlights across all the other activities. We adjusted prices in the Czech Republic market based on the wholesale market development. Obviously, in general, the wholesale market development with the prices going a little bit down in 2020 is not something that we would be extremely happy at the same time. Obviously, prices do go up and down depending on the various kind of short-term developments. And based on this price increase, we adjusted also the retail prices to maintain a stable margin. And we were able to defend the title of the Most Trusted Energy Supplier in Czechia. Also our -- I am going into the more progressive activities, Inven Capital bought into Eliq, a Swedish company; Forto, German company. As you see, we always try to extract the most know-how from these companies for our operation. We often offer their products to our customers as a part of our supply business. And then we, so far, 100% assurance than our part of the sale of the company and even make money on this. So this was another example of this for Inven Capital. And now I'd hand back to Martin to more detailed financial performance overview of the individual business segment.

Thank you, Pavel. So switching to Page 16. You can actually see the details of our strongest segment, which is Generation - traditional energy. All the positive changes of 24% or CZK 4.2 billion EBITDA are born in the Czech Republic. And as I already said, there is a positive effect of higher prices and the year-on-year commodity trading results of CZK 7.9 billion. There is additional income from German -- over-hedge from German contract, which are reclassified to P&L, and it's positive CZK 300 million. Then we have higher generation at nuclear plants, CZK 0.5 billion, lower generation at mainly coal plants, CZK 1.3 billion. We paid more for carbon credits, CZK 2.9 billion. And we had higher revenues from sales of heat, CZK 300 million. When you look at the next slide, you can actually see how our power generation in the traditional energy segment is changing year-on-year. So for the first 9 months, we are down 6%, mainly on our coal-fired power plant. Everything else is going up. On coal-fired, it's mainly due to termination of Prunérov I, which was the oldest plants in our portfolio -- the oldest plant. And we terminated that plant on June the 30. We also had lower generation at other [ brown core ] plant, partly due to market prices. There are spot prices very low during the first wave of COVID crisis, and we did not run those plants. We also had longer outages at Prunérov II, which is a new plant and Ledvice 4, a new plant as well. Year-on-year, the effect will be very similar, 7% down, again, mainly on coal and also 1% on nuclear, which is more due to timing of the outages or shutdowns rather than anything else. But as you saw on the previous slides, we are planning to get about 30 terawatt hours in following -- all following years basically. Important slide, #18, that's where we show actually how we continue hedging our generation revenues. 77% is sold for 2021 at an average price of EUR 46 per megawatt hour. You can see on the chart average hedge volume and average hedge price and also average price of carbon credit, which is steadily growing, actually. On the next slide, you can see new energy generation. We have positive impact from Romanian assets, mainly due to higher gross margin on electricity due to both higher generation and higher prices. In 2019, Romania was pretty weak year in terms of wind conditions. This time, it was much more standard, and that's why we have also impact of the volume. Then the same chart as we saw with traditional energy. You can see actually on Slide 20 for new energy and sales segment. You can see that we are actually 7% up in power generation, basically in all countries. So I already described Romania, but we also have Czech Republic, better conditions, and also Germany. Year-on-year, we'll be up 7%, again in all 3 countries. Sales segment has improved by CZK 1.8 billion, partly is because we had CZK 1.3 billion in the Czech Republic last year as a negative charge, as I already said, when we were paying back money after we lost the court case against railway authorities. Otherwise, all other countries are basically in line with the exception of Romania, where we have a little bit better result due to high gross margin, primarily due to lower cost of purchasing electricity. ESCO services are up 8% year-on-year. However, if you look at the full year results, we were planning to go even higher. We will actually, on a full year basis, will be up 7%. We originally thought that we would -- our revenue would spend or sales would go from CZK 21.8 billion to CZK 25.9 billion. But due to COVID crisis, and this is one of the industries actually our segments in our business that are impacted by COVID, we will get only 7% higher and not 18% higher. Distribution, pretty flat numbers, again, little improvement abroad in Romania and Bulgaria. Czech Republic, fairly stable. Mining. Mining, this year is actually impacted by decrease in revenues from coal sales both CEZ Group due to decommissioning of the Prunérov plant and longer outages at other plants and also smaller, lower external sales, primarily due to lower demand as part of COVID situation as well. Then support services basically flat, same numbers as last year. Now annual outlook. As you know that last quarter, we actually reported our full year outlook at CZK 62 billion to CZK 64 billion on EBITDA and CZK 21 billion to CZK 23 billion on net income. We decided, actually, as we can see the end of the year to actually confirmly one number, and the number is actually, in both cases, the upper limit of the interval -- of the range. So CZK 64 billion EBITDA and CZK 23 billion adjusted net income. Estimated year-on-year change in EBITDA is shown on next slide, actual reconciliation between 2019 and 2020. We have already covered it partly when we were comparing 9 months. So basically, effects are very similar. One slide related actually -- and this is last slide of the main part of the presentation -- to COVID impact. COVID impact on our business is actually about CZK 3 billion, pretty much evenly spread between traditional energy distribution and ESCO services. In case of traditional energy, it's causing us lower spot prices and that's why lower revenues and lower profit on our spot sales, where we had more spot sales than originally planned due to the fact that many of our industrial customers had their plant shutdown during the first wave of COVID, which is not the case now. And that's about CZK 1 billion. Then distribution for many customers is actually a function of how much power they actually consume. So again, less consumed power means -- distributed power means low revenue for distribution, which is a timing effect within 2 years. Make sure distribution will get it back through so-called correction factors from the regulator. And last segment is actually ESCO both Czech and international, where many companies postponed the projects from this year -- our customers, I mean, from this year to next year. Plus we planned for some acquisition activity in terms of M&A deals, which did not materialize because clearly, the prices of the assets were impacted by COVID. On the other hand, sellers still kind of are living in the pre-COVID world. So there is -- there was a rarely match between demanded price and the price that we are offering for the assets. So many of the sales were actually in this segment postponed until the situation gets better. So that's, I think, all for the main part of the presentation. And I think now we are ready to take your questions.

[Operator Instructions] The first question is from Elchin Mammadov of Bloomberg Intelligence.

I have 3 questions, please. Elchin Mammadov from Bloomberg Intelligence. The first one is on 2021. I mean, 2020 guidance is pretty much in the bag. Could you talk a bit more the key developments you expect in 2021 in terms of the moving parts? On one side, you possibly can get higher achieved power price. On the other side, it could probably be offset by higher carbon costs. There could be some COVID-related pluses and minuses. Can you talk a bit more about 2021 outlook? In general, I mean, not an actual guidance, but in general. The second question is on M&A. By the looks of it you're going to avoid paying special dividend, which I think is correct, and redeploy the proceeds. Can you talk a bit more about how you're going to redeploy the capital and how it's going to split between renewables investments, for example, and debt reduction? And the third question is on Czech Coal phase out. I mean can you update where we are with the poll exit commission? And what kind of mechanism are they discussing at the moment? Are they leaning towards option based or fixed compensation? How is it going to look like? So those are the 3 questions for me.

So I will answer the first 2 questions. The following year, of course, as you rightly said, we are not providing any guidance for next year. Clearly, the power prices are somewhat higher for next year, but also cost of carbon credit. Next year, definitely, it looks like it's very highly probable that both Romanian and Bulgarian and Polish assets will leave our portfolio. So our EBITDA will be somewhat lower due to this fact. On the other hand, we've had proceeds from sale. From M&A activities, we will definitely target ESCO companies and renewables, in the Czech Republic, ESCO mainly in German market and markets around Germany. Renewables mainly in the Czech Republic, and it would be aimed at photovoltaic plants. We already have acquired quite a lot of land. That is ours actually on the brownfield. And we would plan to develop photovoltaic there when the support is defined by the government. We will not probably do it without set support, which is now being discussed. For use of proceeds from sale, I think what we said or what I said in the morning. We have felt the situation that part of the proceeds would be used for debt reduction because when we lose some EBITDA, our net debt to EBITDA, of course, will not allow us to have as high level of debt as we would have before or without divesting those assets. But it's only part of the proceeds, of course. And then we would definitely aim the rest to M&A activity, which I just described in growth businesses. And then there was a question about extraordinary dividend. As most of the proceeds from Romania, Bulgaria will be coming before mid-year, it would make no sense to declare or to call extraordinary shareholder meeting. We would rather leave it for ordinary shareholder meeting and may be reflected in ordinary dividend, of course, assessing the situation at this point in time next year. And I will now hand over to Pavel to tell us more about Czech Coal phase out.

Yes. So the Coal Commission has not declared a result yet. Obviously, there are already some preliminary information circulating -- informal information circulating. At this moment, what has been mentioned in the press is on the pure electricity generation that the deadline or the kind of coal phase out, the date would be set at around 2038. And that there would be basically no measures between now and that year. So it would be lapped mostly to the effects of, let's say, the market mechanism, such as CO2 prices and the BAT/BREF limit. And there is no word out on any compensation at this moment. That's for the electricity generation. For the heating, contrary to that, the Minister of Industry announced that it is interested in converting the heating from coal-to-gas even faster, maybe before 2030, gas and renewable. And that there would be both investment support and kind of per megawatt hour subsidy available to the converted heating stations. So -- and this is now in preparation. There was no exact detail, but there is legislation in the legislative process, the renewable law, which already assumes there would be a special subsidy for converting gas stations. And also other word is that, for example, the Modernization Fund should also be able to support these activities.

That's very helpful. And in terms of heating, is it mostly switching coal to gas or coal to biomass, which one is it?

Well, if you go by the way it is being announced, it's mostly coal to anything renewable, mostly in biomass. If you go by volume, it's going to be mostly coal to gas at least at this moment. For kind of the next-generation of heating kind of, obviously, after 2030 or so, there will have to be a new generation of heating, if you want to be like 100% carbon neutral. But right now, the plan is to switch mostly to gas. There's not enough biomass to give the big cities.

The next question is [ Kevin Tuntuffpy ] of Citibank.

I have quite -- 2 -- let's say, 2 questions. Firstly, can you please talk about what -- how quickly are you going to redeploy the capital once you do all of the disposals? Can we count on any special dividend out of the proceeds that you're going to get? And what kind of a CapEx you could see after the disposals? Is there going to be an acceleration of this? And second question, I wanted to ask you about the support for the renewables in Czech. How do you see this happening? Is this going to be per megawatt? It's going to be the auctioning for the new solar, I guess? And that would be the second question.

Okay. So I'll answer the first question. No, we will redeploy the capital as there will be opportunities. So it will not be that we will have to redeploy everything as soon as we get it. We will redeploy it as soon as we find new and interesting opportunities on the market. I would say that -- and we will see how many of those will be available next year in the summer and later. So we'll see. And second question is actually to Pavel.

Yes. I'll answer it maybe and I'll follow-up on Martin. You are asking us in tough times. We had aggressive growth plan, both in the renewables in Czech and as well as in the kind of energy services business to feed off the energy efficiency targets. Obviously, everything now slowed down. The new renewable law and the Modernization Fund preparation were preceded by were preceded by all the COVID legislation. And similarly, both the M&A market as well as the project sales for renewable services are now frozen with the lockdown. So it's very difficult to comment. So we will probably do it kind of quarter-by-quarter, see how the economy comes back to normal. We obviously see the 2030 targets, as I mentioned, they are even more aggressive. So we should be able to really use the opportunities that we have and built on that and get a good share of the opportunities created by this new target, but it's very difficult to judge, if it starts Q1 next year, if it actually starts Q2, Q3 or whatever, like how quickly it goes. It goes back now. Specifically on the renewable what is -- the way it should be sold here in -- sold in Czech is twofold. For everything, but solar, there will be options for tariff, so there will be tariffs that will be auctioned. However, we believe that most of the renewable built in Czech will be solar. So this will not apply to them, to the solar. Solar will be funded by investment subsidies from the Modernization Fund. And there is now a discussion whether it will be also an auction or whether it will be simply a subsidy granted kind of case by case. Meaning you basically apply to the Modernization Fund run by the Ministry of Environment, and they kind of look at the project and they award a subsidy or whether they will announce like a round of subsidies. Everybody comes in and there's an auction for the share of a subsidy. So the percentage of your CapEx, how much you want to be subsidized. But to us, the Modernization Fund at this moment because of also the CO2 prices being pretty high compared to when it was originally designed a couple of years ago should be well funded, well over EUR 4 billion in total. Obviously, not everything is earmarked for solar, but a large portion is earmarked for our renewable, mostly solar. So there should be enough funds available. So to us, right now, the main question is, when will be the kind of the ministries ready to actually get this finally going, when are they being now overwhelmed by all the COVID things.

If I may follow-up on this recycling of capital question. Given that you're going to sell 3 relatively sizable assets, and you will have -- end up with a significant money at hand. Do you think -- and then how you think about the opportunities? Do you think you will go more for organic investment or M&A you also think is considered? And then you actually narrowed down the opportunities to 1 of 2 countries only. So how do you see this capital spend next year or next 2 years?

I won't say that it's one of the countries. It's basically mainly -- organic growth is one thing. In terms of ESCO mainly, in Germany, Austria, Northern Italy, but also Czech Republic, Slovakia, Poland, this will be definitely done through acquisition growth as we have done it so far. But as we said already, it depends on the available target and the valuation, of course. Now there is really a big disconnect between the sellers who are usually -- very usually is building the business for past few decades and have a certain feeling about the value, which is quite significantly impacted by COVID situation, unfortunately, and buyers like us who kind of see this might take a while before it gets back. And that's why there are not that many transactions currently happening in that segment. But if you -- I mean, I guess, if you can differentiate between 2 types of kind of growth or capital deployment, when you look at our standard strategy by -- in terms of like big-ticket items, we are withdrawing from the Eastern European markets and the 4 priorities: so improving the efficiency of our nuclear, building up the Czech renewable, building up the regional ESCO and also modernizing our distribution. You could almost consider like semi-organic, although there are acquisitions as a part of it or investments. Especially in the ESCO business, it's sometimes difficult to differentiate between acquisition and organic and unorganic. But we are not, at this moment in our strategy, thinking that we would make some kind of bold acquisition expanding our target markets. And so from this perspective, obviously, the proceeds are being used for improving the capital structure. And as Martin said, when we will look at the -- when the proceeds actually come in, it will be the time of the standard dividend. And we'll review the capital structure at that moment to see how we can -- what kind of dividend we can actually offer.

The next question is from [ Justin Baldauf ] of Morgan Stanley.

I have 2 questions. Actually, the first one is on the Romanian disposal. I understand that you cannot provide the valuation of the disposal, but you mentioned it's higher than your internal valuation. Would it be possible to disclose the level of the internal valuation you have for the asset? That's the first question. And the second one is, I think I understood there were discussions at some point for cut on solar tariffs in the Czech Republic. If you could provide an update on that, and whether or not it will go ahead?

So regarding Romanian disposal, we really agreed with the counterparty that we will not be presenting the sales price right now. However, we have put a disclosure into our notes to financial statements, where you can find some basic numbers on the disposal. So that's probably as much as we can say. And solar tariffs in the Czech Republic?

Okay, I think I tried to explain distribution with the solar in my previous answer. There will not be most likely an auction for solar tariffs, like 99% reassurance, but there will be an investment subsidy from the Modernization Fund. It should start as early as the first half of next year. The only question mark in this is the exact timing because of COVID. And there is some discussion on how exactly the investment subsidy will be awarded, whether it will be case-by-case or whether it will be based on an auction. But the money is in the plant, is ready. It is agreed and so forth. So it's really only kind of technical time needed to prepare the program and the legislation around it.

Does this answer your questions?