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

Dear, ladies and gentlemen, welcome to the conference call of the ESAB Group regarding 2020 results. At our customer's request, this conference will be recorded. [Operator Instructions] May I now hand over to Barbara, who will lead you through this conference. Please go ahead.

Hello, everyone, and welcome to our regular quarterly results investor call. As usually, we will start with a presentation followed by Q&A. I have here with me, Martin Novák, Chief Financial Officer; and also Pavel Cyrani, Chief Sales and Strategy Officer, who will walk you through the presentation first. I'm now handing over to Martin to start the talk.

Thank you, Barbara. Good afternoon, good morning, everybody. So as Barbara said, I will guide you through first 3 sections of the presentation. We are starting [ this year ], our presentation, with a slide on COVID-19. Financial aspects will be covered later. This is more about what we have done for our company and society in general, how we protected our operations to make sure that electricity supplies are not distorted. And I'm not going to go into the detail. Very likely, most of the companies have done the same. And I will switch to Slide 3, where you can see actually financial highlights of 2020 with all the main numbers. I would point out especially at increased EBITDA of -- that increased by 8% to almost CZK 65 billion; more precisely, CZK 64.8 million. Our net income achieved CZK 5.5 billion, mainly due to impairments of assets that we had to take, and it's mostly related to sale of our assets, both in Romania and Poland. Our adjusted net income, on the other hand, increased by 21% to CZK 22.8 billion. And just as a reminder, adjusted net income is actually used as a base to pay the dividend. Our market cap reached to CZK 276 billion or something above EUR 10 billion. And the important information on this slide is actually that our S&P rating was confirmed on A level and actually was moved from negative watch to stable. Negative was mostly given by S&P to almost basically all utilities in this range on March of last year when COVID started. Now it was actually put back on stable. Key events of 2020, and there is a new proposal of EU commission to increase 2030 targets for CO2 emission reductions to 55%. Price of emission allowances exceeded EUR 40, which is all-time high as far as I remember. I think I remember from the beginning of the scheme. We actually had a Czech Coal Commission that recommended to the government to end coal mining and use of coal, basically in our -- in coal power plants in the Czech Republic by 2038. We generated 30 terawatt hours of nuclear plants, which is a high level, of 61 terawatt hours of electricity. Important, despite actually COVID-19, we paid CZK 18 billion in dividends to our shareholder, reaching 6.7% payout ratio. We also are actually in the process of disposing our Bulgarian Romanian assets that I will comment later on. And you will also hear about new contracts for the Czech government actually on construction of new nuclear plants. On the next slide, you can see actually the details of what is originally agreed regarding reduction of greenhouse gases, renewable share and energy savings, energy efficiency, as it is today. And actually, a new proposal of European Commission. And all of those categories are basically increasing all the targets even further. On the next slide, you can see development of power prices during 2020 and also our CO2 cost. Especially, CO2 started at the level of 25, went down to 15 during first lockdown in March, and now it's exceeding EUR 40 again. Very similar is the movement of power prices. So now they are close to 55 and -- which is a relatively high level compared to previous few years. And again, you will see actually later on, how it impacts our hedges and our average sales price of electricity. It's important to notice that, actually, we are reducing our carbon footprint, both for ESG purposes, but mainly because of costs related to running lignite plants. Actually, in 2020, we moved to the level of 0.33 million ton of CO2 per megawatt hour produced, which is below CCGT plant that has an average of 0.35 ton. So our overall portfolio is fairly clean compared to other -- to actually margin on power plant in Germany, which is 0.55. And for 2021, we plan to reach 0.28 ton of CO2 per megawatt hour produced. We also proved in 2020 that sustainable development and social responsibility are our targets as well, apart from financial target. We are showing some main initiatives in the ESG area. Of course, starting with a gradual reduction of CO2 emissions. And I'm not going through all the initiatives. They are listed on this page. And I'm certain that you will hear more about it during this year as we pay high attention actually to ESG agenda. And of course, in our terms, it's many activities that you can see here, but mainly a reduction of our coal output. Regarding disposals, actually, our strategy from 2019 is aimed actually to improving our risk profile, meaning the decarbonization of general -- generation portfolio, both in the Czech Republic and abroad, mainly in Poland, meaning we are selling actually our Polish assets and the Romanian and Bulgarian assets. And proceeds actually from the sale will be used first on decreasing our debt because some EBITDA will disappear from our books. So we will have to reduce our debt as well to be able to keep our rating where it is. We will use the proceeds to develop new investments, mainly in the Czech Republic in renewables. And also in ESCO in Central Europe. And of course, we believe there is a space for paying higher dividend than 100% payout, meaning that we will use some of the proceeds actually to add to our traditional payout ratio, which is 80% to 100% of our net income. And as most of you know, we pay close to 100% rather than to 80%. So with some proceeds from Romania now, which would be settled by 31st of March. Our payout ratio would likely be above 100% for 2020. Talking about those, I already actually described Romania where we plan to sell -- to dispose our assets and the transaction should be settled, meaning the money should arrive on our account by the end of this month. In Bulgaria, after 2 years of difficult situation related to Bulgarian governmental authorities, antimonopoly office and so on, we actually managed to obtain all approvals, although some of them through court rulings, and we expect the settlement of the transaction to be done by June 30. So by the end of second quarter. Now of course, this is less certain than Romania, where it is very certain that the transaction will materialize by the end of this month. We also have an arbitration claim against Bulgaria for harming our investment, and this is not touched by the sales process. So we will be actually -- we are kind of continuing in arbitration, and we are not selling the arbitration claim as part of the transaction. Poland, we started our disposal process in September. Originally wanted to start in spring, but due to first wave of COVID decided to postpone it, started in September, just between the waves. And we expect actually to -- we received about 14 expressions of interest. And the standard check on the bidders was done in October. We have received 5 offers in December of last year. And second binding offers will actually be submitted by during second quarter 2021. We would expect that we will actually settle the transaction by the end of the year. So Poland stays in our books for full 2021. Our strategic priorities for this year. Actually, in generation and mining, actually, are about increasing generation at nuclear power plants to 30.5 terawatt hours. So adding a little bit to 30 terawatt hours that we achieved in 2020. Starting -- we would like to start or roll out construction of renewables, speaking about it, photovoltaics, actually, solar panels in the Czech Republic. And our goal is to build 1 gigawatt or 1,000 megawatts by 2025. We also will be decommissioning Unit 3 of Munich power plant, which is 500 megawatts in coal, one of the oldest plants in our portfolio, should shut it down in the middle of August. And we would like to obtain authorization and zoning permit for -- and start contractor selection for new nuclear power plant that will be -- it looks like it will be basically fully financed by state. But Pavel Tirano will touch on it later in his section. In distribution, we would like to digitalize end-to-end distribution process and support services. Then we would like to carry on the investment program, CapEx program that we have in place. In sales, very similar digitalization efforts. And we would also stabilize -- like to stabilize our ESCO business, because ESCO business, both in the Czech Republic, Slovakia and Germany, was the most impacted business by COVID, as you will see in later slides. In our divestment strategy, we would like to sell Romania, Bulgaria and Poland. And protecting our interest through arbitration in Bulgaria. So those are general highlights. And now I will actually switch to our financials. And there is plenty of slides, so I will skip some in -- as they are too detailed and you have probably had time to look at it already. So there's no point in going through every single detail, but I will definitely concentrate on highlighting the main facts. So our financial performance in 2020 can be seen on Slide 14. We actually moved from CZK 60.2 billion EBITDA in 2019 to CZK 64.8 billion, which is an 8% increase. And on adjusted net income from CZK 18.1 (sic) [ 18.9 ] billion to CZK 22.8 billion, which is 21% increase. There is a significant decrease actually in the net income as such from CZK 14.5 billion to CZK 5.5 billion. But mainly, the biggest difference or the biggest adjustment is related actually to foreign losses in terms of currency sources. Between acquisition price or acquisition exchange rate of our Romanian assets and sales exchange rate, which cannot be depreciated over time, but it has to be written off only when you dispose the investment, and that's why entire amount of about CZK 9 billion just coming from this recalculation is coming to -- a big part of it is actually coming into our earnings. Year-on-year effects on EBITDA, actually, higher realization prices or higher sales prices actually of power. Against it, we have actually higher expenses on carbon credits, which went up. And we had lower operations of our for sale plant because some of them were actually shut down or decommissioned and, unfortunately, the plant was sold. We had also longer outages of the plant. And due to summer low prices, actually, some of them we didn't -- just didn't use because it was not worth it. Despite having a negative impact of EBITDA, which I will cover later, we managed actually to make up for that difference and ended up with very similar numbers that we originally planned. So on the next slide, you can see actually year-on-year change in EBITDA. We have split it into strategic assets and assets held for sale, which is important because we will continue our operations after 2021, basically with strategic assets, and that's why we would like to show you a comparable basis. So on strategic asset side, we moved from CZK 54.2 billion to CZK 57.2 billion, on assets held for sale from CZK 6 billion EBITDA to CZK 7.6 billion. Main positive reasons why we actually increased our EBITDA by CZK 4.6 billion in total is that we enjoyed high-power prices as an effect of power prices going up and our hedging policy. On the other hand, we had to pay more for carbon allowances. We were running our lignite power plants a bit less, meaning we also were not mining that much coal. And that's why we had a negative impact on our coal mining activities. And we received 1 point -- and we did not have to pay, which is important, CZK 1.3 billion to railway authority for electricity not contracted but not taken from us. It's 2010 issue. And actually in 2019, we had to pay back CZK 1.3 billion to them as a decision of court, which was a negative charge in 2019 that we did not have in 2020, obviously, and that's why it looks like a positive effect into 2020. Then the negative effect of COVID, it's important to mention. When it all started, actually, our estimate was about CZK 3 billion, but it was very difficult to estimate. So on the 17th of March, which is almost a year ago, yes, we announced our 2020 estimate of EBITDA at the level of CZK 63 billion to CZK 65 billion. Then in May, reduced it to CZK 61 billion to CZK 64. And actually, we go back to almost CZK 65 billion, which is the maximum that we were hoping for at the beginning of last year. So despite the CZK 3 billion effect on EBITDA, we were able to make it up in other sectors of our business, mainly in trading activities. Our -- we were actually impacted by COVID in the sales segment, about CZK 1.5 billion in sales. It's mainly ESCO projects where our B2B customers have either shut down their operations in spring, delayed actually installations of the new equipment, are kind of uncertain with their future. So they are kind of waiting to see if the situation gets better. And we hope that this is getting over partly because of the vaccination, and many countries are getting out of COVID partly because of companies learning to live in such an environment and especially industrial companies, and they understand that they have to go on no matter what's happening. And the business is going on. And not everybody was impacted negatively, of course. Distribution segment, about CZK 500 million. This is a function of lower distribution of electricity, which declined in general by 3%. And then generation, CZK 1 billion negative impact, mainly coming from mining activities. As we mined less coal, as we did not need to run our plants that much and also lower spot prices actually during summer and spring of last year. Other income expenses, actually, you can -- everything behind EBITDA. Here, you can see in depreciation and amortization and impairments, significant increase of CZK 18.5 billion. And you can see the detail below the table. So in Romania, it's CZK 12.5 billion negative impact. Most of it is related to foreign currency losses. Poland, CZK 4.3 billion. This is an impairment on Polish assets due to coal situation, meaning high carbon prices and power price is not really catching up with them. In Czech Republic, CZK 2.1 billion, again, mainly related to impairment at our mining activities. So that's -- those are the main differences. Other income expenses, positive CZK 3.3 billion. Actually, after we signed the contracted Macquarie on selling remaining assets, we immediately hedged the price, and the positive impact of euro hedge is actually CZK 1 billion. And we also managed to, after a few years of court case against the state, against Czech Republic, we managed to receive CZK 1.5 billion on tax that was charged to us in 2011 and '12. In 2011 and '12, Czech tax authorities charged everybody who got carbon allowance for free, and we were getting a lot for free at that time. So-called gift tax, which then was ruled by court as illegal, and we got the money back. We got also CZK 700 million of interest, but we actually claimed more interest from the date when the money were paid and not from the date when the resolution was made that we should get it back. And that's why we claimed another CZK 1.5 billion, and we actually won it in front of all courts and received it in, I think, in October of -- September or October of last year. So that's what it is. We are getting the net income of CZK 5.5 billion. And actually, you can see all the adjustments that we are putting back, basically noncash items that are mainly impairments of our assets where really cash stays with us. It's there and it's available to pay the dividend. That's why we are actually putting it back into so-called adjusted net income. And that ended up at CZK 22.8 billion. I will skip a slide on our financial and operating results, all the metrics. Some of them were already covered. And go back to -- and go to next slide, Slide 19, which is actually a financial outlook for 2021, and it will definitely require some explanation. Our outlook for 2021 is EBITDA of -- on a strategic asset that -- where we reached CZK 57.2 billion in 2020. We now expect CZK 54 billion to CZK 57 billion. On assets held for sale, that generated CZK 7.6 billion EBITDA last year, we would expect to reach something like CZK 6 billion if we keep those assets for 12 months. So comparable numbers. So comparable number, with CZK 64.8 billion, it's actually CZK 60 billion to CZK 63 billion. In reality, we expect Romania to be disposed by the end of this month, Bulgaria in the middle of the year, and Poland will be kept for full year. In such a case, we expect that actually EBITDA generated by those assets will be something like CZK 2 billion to CZK 3 billion. For simplicity, let's say, CZK 3 billion. So in such a case, we will be looking at real EBITDA of CZK 57 billion to CZK 60 billion. So I'm adding CZK 3 billion from foreign operations in 254, 257, which means CZK 57 billion to CZK 60 billion is a real EBITDA that we would expect as our best guess. However, we wanted to show comparable numbers and that's why we show it in this format. There is no impact on net income because -- adjusted net income because all net proceeds from those operations belong to the buyers from -- for 2021 already. So there is no impact, whether we sell it now or later on. On next slide, there is a reconciliation between EBITDA 2020 and 2021, where you can see the details. Now let's switch to next slide, Slide 21, where actually, you can see that we are changing structure of our key operating segments from January 1. Newly, we have 4 segments: sales, distribution, generation and mining. So until the end of the year, we had mining, which is mining, a new segment -- as a new segment, stays the same. Then we have generation traditional energy generation, new energy and support services. All those will become part of generation, but we will be showing a detailed breakdown generation nuclear, generation renewables, generation fossil and generation trading, which is -- which kind of shows more detail on various parts of our segments, especially splitting traditional energy into nuclear and fossil fuels. So that you will be able to see actually the impact on EBITDA of both of those segments and, of course, on other volumetric numbers. We will be also showing separately trading as it is an important part of our business. It achieved CZK 3.8 billion actually of last year's EBITDA and basically made up for a loss from -- due to COVID. Sales stays the same and distribution -- state distribution. Showing you actually our share of fossil fuels in generation looking through the eyes of our newly changed segment. Our fossil fuels will be -- will actually deliver less than 10% EBITDA in 2021. 6% will be coming from mining and 3% from fossil plants. Why we have actually such a decline from 10% to 3% in fossil fuel generation, mainly because we shut down 1 plant last year and disposed 1, Pocerady. We will be shutting down 1 plant in Melník. And generally, the spread between sales price and carbon credits or electricity price and carbon credit is narrower, which means the economics is more difficult. So now let's switch to EBITDA by segments. So now traditional generation and mining. Here, you can see that actually in traditional energy in the Czech Republic, we increased our EBITDA by 15% to CZK 28.5 billion. In mining, on the other hand, we went down from 5 to 3.4, 1.6 negative, mainly due to lower sales of coal. CZK 1.1 billion out of those is actually attributable to CEZ supplies and CZK 0.4 billion to our external customers who were also buying glass coal because of slowdown in economy actually in 2020 because of COVID situation. New energy generation, meaning renewables in Czech Republic and Germany, basically flat numbers, same with support services. Electricity generation of non-strategic assets, we are no more showing actually our assets held for sale as Romania, which is basically the only generation assets in renewables. So we are now showing those strategic assets. Year-on-year, we had a decline on our coal because of those reasons that I just said, we had lower generation in many plants due to unfavorable changes in market conditions. The shutdown Prunerov 1 plant on June 30. We had a little lower generation in CCGT due to outage, longer planned outage. We had 1% reduction in nuclear, but very slightly from 30.2 to 30 terawatt hours, and we had increase in renewables. So that's basically comparison to 2019. Our event -- selected events in 2020 can be described here. What's important on that slide, and I will not go through details. You'll see that basically, we are kind of flat around 30 terawatt hours with our nuclear power generation, which is a key to our success actually and key to our EBITDA. As you could see on the chart, I think 2 charts ago on the pie chart, and you can see how much EBITDA is actually generated by nuclear, and we are planning to increase it to 30.5 this year. So basically, running at full speed. Renewables, selected events in the Czech Republic. We have them actually on those slides. I would really skip the details. You can read them here. Same abroad, but we are selling Romania anyway. So probably not -- no reason to pay too much attention. Same -- a lot of details actually on for fossil fuels facilities and mining in the Czech Republic. I would say that the most important is sale of a company called [indiscernible] to actually our counterparty that was supplying coal. We had a contract that we are able to sell the plant as of 1st of January 2024, if I'm not mistaken. And now actually, we accelerated the sale, and we sold it as of January 1, 2021. Estimated electricity generation that's more important about the future. We would like to decrease our power generation by 5% but mainly in coal. And basically, every other part of generation segment should be growing. Coal will be reduced by 19%, mainly due to sale of Pocerady at the beginning of the year, which was 1,000 megawatt planned. We are closing -- we have closed Prunérov 1 in June 30, 2020. We will have longer outages at other plants. We are shutting down 500 megawatts in near Praque, in Munich, and that will actually lead to lower power generation. On the other hand, we are planning to increase our CCGT plant by 7% and by 2%, and that's important, we plan to grow our nuclear output, and we would like to keep flat or slightly grow actually our renewables. From -- an important slide, actually, the last slide of this financial part is -- generation part, sorry, is actually related to our hedging. I think last year, we actually, in 2020, our average achieved price was EUR 45 per megawatt hour and EUR 15 per ton of CO2. This year, we are looking, after we sell the remaining volume, at EUR 48 average achieved price and EUR 24 per ton of CO2. And following years can be seen here as well. So basically fluctuate oscillating around EUR 48 per megawatt hour with -- and EUR 22, EUR 23, EUR 25 per ton of CO2. So that's all for my part. And now, I will hand over to Pavel Cyrani.

Yes, thank you, Martin. Hello, everyone. I will touch briefly on 2 topics, one is the new nuclear power plant in Dukovany, which we have been preparing according to the contract signed with the government in July last year. I will not go into too much detail. But as you can see on Page 33, there has been basically the preparation and licensing steps done. On our side, we have been able to receive the r facility siting permit. We have also transferred all the personnel into the actual daughter company, the SPV Elektrarna Dukovany 2. And we have prepared the documentation for the tender there on the government side. The bill, which mandated later, the ministry of industry to conclude an offtake contract is going through the parliament. It's currently under discussion in the third and last round of reading. And along with it, there is a discussion on the last few parameters of the tender, especially the extent of potential suppliers who would be invited to the tender within the government and then between the government and us. So the tender is waiting for this decision on the government side. And last but not least, there is already some initial pre-meet obligation discussion going on between the government and the European Commission. Now what is ahead of us, except for -- continuing with the licensing, I guess the main thing is upon approval of the law is the final agreement on the financing and the offtake parameters. The financing basically has been developed in 2 options. The first option is that CEZ would provide, as a company, the equity for Phase 1 and Phase 2. Phase 2 finishing in 2029. And roughly, these 2 phases making up about EUR 1 billion Phase 1, which is currently already part of the contract. So about EUR 150 million. Now the second option that is also being discussed and was discussed in kind of in the public arena was that CEZ would actually provide no equity, and all the financing would be provided by the government to allow for as low off-take price as possible. And we are basically discussing with the government both options. And there is no final, final agreement on the parameters or the decisions in this matter, but that should be the topic of 2021. But again, the discussion is now going between providing 0 equity to providing up to EUR 1 billion equity. This is kind of the range with its limits. And the government at this moment is standing more towards the 0 equity providing from CEZ side. That's on the new nuclear. And for the distribution sales and trading parts, Martin already mentioned that the trading team did again a good job last year providing a more than expected trading margin that helped to offset the impact of COVID on the other parts of our business. And I think the team is also into a good start this year. In terms of distribution and sales. On the distribution side, we see a year-on-year flat and we see a little bit decrease expected for 2021 that is being driven by the changes for the fifth regulatory period, which I will comment later on. We saw a slight decrease in the allowed returns, which will be eventually more than offset by the extra budget for investing into the modernization and smartification of the grid. But at this moment, we see a small dip in 2021. In terms of sales, we see a year-on-year increase for 2020, and we are expecting further increase for 2021. Martin was explaining that for 2020. We saw a hit or a decrease driven by the effects of COVID on the realization of the project. But we already see signs of recovery, not maybe that we would be getting rid of the COVID [ quest ] that everybody was hoping for, but the customers are returning to their projects and doing them anyway with the safety measures we all learn to live with. In terms of the numbers on Page 37, we see the distributed amount of electricity. You saw -- we saw a drop in wholesale customers, kind of the corporate customers year-on-year 2020, and an increase in the retail customers, most likely driven by the fact that a lot of people were under home office kind of mode. In terms of what we expect for 2021, we expect now taking apart the potential effect of differences in temperature, we expect that the electricity -- distributed electricity and electricity consumption would start growing again year-on-year. Page 38 shows the main parameters of the new regulatory period. I thought it would be helpful to show it again here. Basically, several effects. For one, we see a newly set nominal pretax WACC at 6.54%, which is, as I said, a slight drop. At the same time, we were able to negotiate that there would be, over the period, an adjustment of direct asset base towards the total book value of assets, and you see the numbers in the parenthesis, as we go from 82% of the book value up to 100% by 2025. At the same time, given the demand for smart metering in general, like digitalization and smartification of the distribution grid, we also plan to increase our investment planned CapEx plan for the coming years. Our estimate or plan is shown in the graph. And from that, we aim to achieve the already historically announced EUR 20 billion EBITDA target for distribution. In terms of retail, which -- from Page 39, there, the retail saw actually an increase of gas and electricity supply as already mentioned. And it was one of the effects that also helped to offset the decrease on the corporate side of the customers. If you allow me, I'm just flipping through. And if you look at Page 41, you see the revenues from the ESCO services. You see that we expected a significant rate of growth up to CZK 26 billion for this year, but eventually still like only 1% growth to CZK 22 billion. We expect the growth to return for 2021. And looking at the way our salespeople are able to contract and launch new projects we see good signs of kind of recovery in the economic activities. Making this target, hopefully, achievable. You may ask why did we see a drop in EBITDA when we have a flat revenue development. It's basically driven by 2 things on the ESCO services side. The services is that all the COVID measures, kind of the delays the need to -- or the fact that we could not use the workforce from other countries at the projects as we normally do, that increased temporarily the cost base and added some other inefficiencies that decreased the EBITDA margin, but the measures taken should make up for it for 2021. In terms of supply of electricity, the way we book electricity within the company is that we buy electricity from generation, like book to book internally for the large customers on a year ahead basis. And then if the electricity is not consumed by the customers, we need to sort it into the market, I would say, the prices were lower. And this kind of loss of spot market versus the originally expected sales price to the customers is then booked as a loss of the CEZ ESCO company. Well, in terms of some other comments, I think we still see quite appetite of the company is growing again for the energy efficiency measures, which is also driven by the European Commission agenda. We see also a lot of innovation coming in which we are trying to tap into. Page 43 shows the Inven Capital activity. And then Page 44 shows the development in the electric mobility. I would say all of these things are, at this moment, not at the beginning, but like in the initial stage of the development, probably a little bit slower than we expected due to COVID. But all these things are, again, now taking off and should contribute further to company's development going forward. And with this, back to Barbara.

Yes. And now, operator, we are ready for questions.

[Operator Instructions] We have the first question. It's from Elchin Mammadov.

Elchin Mammadov from Bloomberg Intelligence. I have 3 questions, please. The first one is on carbon price. Now my understanding was that higher carbon price is a net positive for CEZ, because you have your nuclear fleet and whatnot. However, we're seeing 2021 results negatively impacted by carbon. Is it because the phaseout of reallocation, or any other issue? In other words, what -- how should we think about long-term development of carbon prices, which is hitting all-time highs every week these days? Is it net positive or net negative for CEZ? So this is question number one. For the question number two is, I just wanted to check whether you're considering to hedge your long-term carbon positions like RWE did when the prices were EUR 15 to EUR 20 or even less. I mean, is it too late now? Or is it something that you're considering? And finally, on the special dividend. You mentioned that you may use the proceeds from the sale partially to pay dividend in excess of 100% payout. Why are you considering doing it? Because we're seeing some of your competitors either reducing the payout or even doing a capital increase, so to boost the investment in renewables and whatnot. So why do you think it's better to increase payouts rather than dedicate all of your sales proceeds to cutting debt and CapEx?

Okay. On the carbon side, I think -- thank you for the questions. We are definitely a company, which benefits from the carbon price increase because even today, we are at around half of the -- with our average emission intensity is at around half of the marginal plant in Germany. And it should be even below that for 2021. Now in terms of the changes in the income, which you probably referred to on Page 20. As it is always the case, a number of factors, some of them kind of one-off, are shown on this. Number one, the increase in CO2 prices is kind of translated into our income only along the dripping, but that, in general, should not have a such a big impact. Secondly, there is a -- there was a significant increase of ancillary services and there is then a decrease of ancillary services for this year and the end of last year, given some changes in the way the auctions are run. So there is some kind of a year-on-year fluctuation on ancillary services, which are almost predominantly provided by the emission facility. So that's the impact, which then doesn't show the net effect of electricity alone. Okay. We are thinking this effect aside and taking other effects such as like planning of outages, planning of refurbishments and maintenance and so forth, taking this aside, we do have about 0.22 0.3 of CO2 price effect of CO2 price increasing.

Regarding hedges, actually, our hedging strategy that we reviewed 2 years ago or 1.5 years ago, is actually such that we -- at the same time, when we sell power, we also hedge carbon credits. CO2 because those two are actually clearly interlinks. And we are really not betting the big volume on trying to estimate whether carbon prices are high or low because nobody really knows. And this is actually part of our trading activities, trading, speculating on the movement of not only power prices but also carbon credit. And this is part of CZK 3.8 billion that actually were delivered last year through our speculative trading. But we are not really doing that with the big volume. We have seen carbon credits being at EUR 5, not a long time ago. Now they are much higher. Nobody really can estimate which way they will go. So hedging both carbon credit and power price at the same time seems to be, at least in our point of view, the best thing we can do. Special dividend. We are -- actually, yes, we will be reducing debt using proceeds from sales. We will be also investing in new CapEx into renewables. But we believe that some of the proceeds could be shared with our shareholders. We are a company that has a very low level of debt. We are on A- rating from S&P, so we can afford to pay a little bit over 100% or, I would say, extraordinary part of or special part of ordinary dividend when we have such a sizable proceeds actually coming to our bank account by this -- the end of March.

Very useful. So just to follow-up on the hedging/carbon question. So if tomorrow, carbon price goes to 100 or something, assuming that there's an equal increase in wholesale power prices. On a net basis, is it positive or negative for CEZ? I'm just trying to...

On a net basis, it's positive. Yes, because nuclear power plants will immediately sell their power for significantly higher amount of euros. So very positive. And one negative effect also in the carbon is that you might remember that we were getting carbon credits for free. And I think year-on-year difference is CZK 2.5 million actually that we don't get for free. Soas it is decreasing. So we just have to buy more because we don't get it for free anymore.

We have a next question by [ Kevin ], Citibank.

It's Piotr Dzieciolowski from Citi. I have 2 questions. So the first one, if I may please go to the Page 22, when you show a breakup of the -- breakdown of the EBITDA for 2021. I just wanted to understand if you really would -- all what you make is 3% on the thermal fossil fuel generation times your guidance, which is at the middle of the range, 57 billion or 56 billion. So you're making only around CZK 2 billion from the lignite and gas altogether, if this is a threat that's made. And if this is true, can this go negative, because that -- we're talking about this number being generated on the back of the hedges you have, which is 45 or whatever the power price is in EUR 22 carbon. And that definitely gets squeezed on the 40 carbon per tonne. So on the 3-year view, can this number be negative? And how do you see this? That's the first question. And second question would be around the dividend. So if you have all of this dilution, is it fair to assume that the dividends will also go down once you dispose all of these assets? Or what could be the dilution on the bottom line and on the dividends going forward?

I think dividend is driven -- answering your second question, dividend is driven by adjusted net income where our policy is 80% to 100% of adjusted net income. So the dividend sometimes goes up, sometimes goes down. 2 years ago, it was down, then we increased it significantly last year, actually due to higher earnings. So yes, it is possible. That's why we provide guidance actually on the dividend. Then, yes, you are right that actually a contribution of thermal coal plants in those squeezed times that we are living through today is not very significant. Normally, what we would do to optimize the operations, we will probably shut down some of them as we did in summer of this year when it was just easier for us and cheaper for us to buy power actually on the market and deliveries rather than make it in our power plants. But clearly, with the high carbon prices, not fully being followed by prices of electricity, this segment is under pressure. That's what it is. And we are -- that's why we are happy actually to have remaining segments in power generation, which is gas, nuclear and of course, sales and distribution.

But I was more on -- sorry.

This is Pavel Cyrani. Just for the kind of the overall profitability, because we supply our lignite plants or basically, most of them by now and eventually all of them from our own lignite. You need to look at the sum of the 3-plus the 6% to judge whether that is negative or positive because we need to look at it kind of end-to-end.

We have a next question by [ Arthur ] Sitbon.

It's Arthur Sitbon. My first question is on the new nuclear project. I was wondering if you could walk us through the implications of potentially having the Czech state financing -- fully financing the project? What would it change for you and for the economics of the project? My second question is on the level of net debt-to-EBITDA ratio that you target for -- by the end of 2021, because I've seen quite a large drop this year. And so I was wondering if you were trying to keep a similar level? And yes, that's it from me.

On the obligations related -- connected to the 100% financing. I'm not sure I fully understand the question. But what -- the discussion is that all the capital would be provided then by the state. That basically -- the way that the government thinks about and the way it's kind of set up is -- or intended to be set up, is that basically should translate into a lower offtake price. And from this perspective, CEZ as the mother company would act in a way as an agent that would basically do the project, but would not finance its money and would not kind of risk its equity. Because of the setup, it's hard to be still kind of discussed and negotiated.

I was wondering if that meant that typically, when you say that it would be fully financed by the government, would that mean that in the case of cost overruns, for example, would the incremental capital come from the government or from CEZ?

Look, the details of the things are not negotiated. But obviously, any type of setup would need to balance the potential kind of gains or profit for just versus potential risks. So that's definitely on top of our mind going into the negotiation, and this was not discussed. Yes.

And second question, I have difficulties to hear it. Could you repeat it? And on the second question.

Yes, I was wondering which level of net debt-to-EBITDA ratio you would be targeting by the end of 2021, given the steep decline in 2020.

Generally, our maximum that we are targeting is 3, 3x debt to EBITDA, trying to stay under a little bit. So it really depends on opportunities that we have both in CapEx area, which is clearly defined now for full year and also in M&A activity related to ESCO activities, for example, in Germany, Northern Italy or Austria. But our threshold or limit is 3. I'm not saying that we will get there by the end of the year. I don't simply know.

We have a next question by Teresa Schinwald.

My 2 questions are the first one, a simple one, is there a special reason why hedging stood at 89% at year-end? I remember it being around 95% usually in the past. And the second one is a wider general question. With the renewables market, first now being clearly a sellers market. And now also the oil majors in the games, sort of things going on, can you tell us a bit more about the pipeline with which you would like to achieve your, I think, 1 gigawatt renewables expansion target by 2025?

Yes. Okay. I'll start with the renewable part. Yes, at this moment, our now kind of target for now is 1,000 megawatt, 1 gigawatt for 2025. It is the case that larger players are into it. However, we are now mostly focusing on the restart of the renewable buildup intended for the Czech Republic with the start of the modernization fund. The modernization fund is now in the final kind of dies and rounds of discussions of the details of the rounds of providing subsidies. We expect these first auctions to be announced in -- within kind of 1 to 2 months. And I think we are in a good position to use that because we are already working hard on developing a pipeline of projects. The first hundreds, meaning like kind of 500 megawatts, being linked to our brownfields reclaimed land after mining and so forth. And additional 500 megawatts also other land that is not being used for farming. So this is already under work. And also even the modernization fund kind of pre collected interest, and we basically applied with all these projects already in this kind of interest raising around. In terms of dripping, honestly, we have a corridor with both 89 and 85 fall into. And there is some kind of variation room for our traders to place and drip the electricity within this quarter. So I don't think there was any kind of specific strategic reason to change that. It is more simply the kind of the development of the daily work of our traders.

[Operator Instructions] Our next question is from [ Kevin Stozki ].

It's [ Kevin Stozki ]. Sorry, again, I wanted to ask your view on the emission ratio of the European power system or German power system to which you are exposed more kind of beyond 2025 and towards the end of the decade. Because at the moment, the argument is that you are positively geared towards higher CO2 because your emission ratio, your average emission ratio is lower than the marginal ratio of the system. And I just wanted to understand whether -- how we should think about it in around 10 years from now? And is the power price going to be a lot less sensitive to CO2 going forward? And when are we going to see it really?

Okay. Well, our -- we -- as you see on Page 7, we basically set 2 hurdles. One was the current emission of the [indiscernible] power plant, which is a mixture of gas and still hard coal. And then we have another hurdle, which is the emission of a new CCGT plan, highly efficient. So these are the 2 hurdles. Obviously, we are not -- this is also not the end. We intend to decrease this emission factor even further. And I think with that, we should still be below the kind of Central European emission marginal power emission factor. You are right that, for example, if we quickly switched to a new CCGT standard this very moment, even though we are under the sensitivity of CO2 price into the power price gets lower and lower. We'll see how quickly will Germany be actually decommissioning, it's a hard coal fleet. I think the jury is still out on the exact trajectory going towards the 2038 closure. And secondly, what we will also see how exactly will the system behave at times of a shortage. Because although we may see more hours with, for example, renewable only. At times of not enough renewable electricity, we may see high spikes, and that would drive or keep the average power prices at some levels. Difficult to predict for 2030.

We have a next question from Bram Buring.

This is Bram Buring from Wood & Company. Just a couple of questions following up on previous ones. Regarding the recently asked question you were saying that the first auctions linked to the checking modernization fund should be launched in 2 to 3 months. My question is, could you just remind me, are those -- are you launching in here for subsidies to build, or are you auctioning for feed-in tariffs? And the second question is with regards to the cost of the Phase 2 for the new program. So the range of costs expected here free -- or the equity contribution expected here now from you is from 0 to up to EUR 1 billion, did I understand correctly? Or does the EUR 1 billion include what you're already spending the Phase 1 of the project?

On the auctions, the auctions will be for an investment subsidy, from that like terawatt investment subsidy. And in terms of the costs for Phase 1 and Phase 2, is around EUR 1 billion in total. So that would include the roughly EUR 150 million budget for Phase 1.

Okay. So Phase 2 is still around, let's say, tops EUR 850 million?

Exactly.

We have the next question by Elchin Mammadov.

Follow up question, I have 2, please. The first one is on Czech German power price spread. If I remember correctly, your 2020 numbers were positively impacted by it. How do you see the spread developing so far this year? I mean, we've already seen pretty much 2.5 months gone. So are you still benefiting from it? And the second question is on impairment. I mean 2020 was a busy year. Do you expect anything similar this year? Or are we done with this? I mean, yes. So that's all for me.

So I guess start with impairments. Yes, 2020 was a very busy year in our numbers. Regarding impairments, I would think it was the busiest year ever. So clearly, impairments coming from Germany, from Romania, Bulgaria, Poland are very unlikely just because Bulgaria, Romania will not be in our portfolio and possibly Poland as well. So I wouldn't expect anything terribly high. Regarding Czech coal plants, for example, they are, with one exception now, part of CEZ, as a parent company together with nuclear. So it's one cash flow generation unit. So we don't see any impairment there. Detmarovice plant, which is actually the only plant, which is set aside in a legal entity has gone through all impairments that it could have gone through, I guess. So there might be something on coal mining activities. In case, Czech Coal Commission will decide -- the Czech government would, for example, not follow 2038, which is the date of suggested decommissioning of coal in the Czech Republic and would move it, let's say, to 2033. This is something that has been discussed, but probably does not have a majority. There's not a consensus on that date. Then, of course, it could have an impact on our, for example, mining activities. It's really difficult to predict how much. But definitely, foreign operations should have no significant impact, definitely not comparable to what we have seen now.

And in terms of the spreads, yes, we still see about a EUR 2 difference between the Czech and German prices for Cal 22. So the spreads are a little bit lower than what we saw last year, but we still see the trend that, at this moment, basically, electricity price increases eastward from Germany into Czech and further on to Balkans, which is still short of power and stacking power out of the region and increasing price along the way of this flow.

There are no further questions. I hand back to you, Barbara.

Okay. So thank you, everyone, for taking part. And we will hear you again at the latest in the first quarter results announcement in May, if not, individually earlier. Thank you very much, and bye-bye, everyone.

Goodbye.

Thank you. Goodbye.

Dear, ladies and gentlemen, thank you for your attendance. This call has been concluded. You may disconnect it.