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

Dear, ladies and gentlemen, welcome to the conference call of CEZ Group regarding the results for the first quarter of 2021. At our customers' request, this conference will be recorded. [Operator Instructions] May I now hand you over to Barbara Seidlova, who will lead you through this conference. Please go ahead.

Hello, everyone, at just a quarterly call. But first, I would like to apologize, there were some technical issues with -- on this provider side, but I hope now we are -- everything is all set. So I can introduce today's speakers. As usually, the presentation will be given by Martin Novak, Chief Finance Officer; and by Pavel Cyrani, Chief Sales and Strategy Officer. Now I'm handing over to Martin.

Good afternoon, good morning, everybody. So let me guide you through briefly our financial and operating results that you can see actually on Slide 2. And you can see all the important metrics. Starting with revenues, EBITDA that reached CZK 19.9 billion. Net income, reaching CZK 8.4 billion, which is identical with net adjusted net income. As we had basically no adjustments this quarter -- last quarter, actually. Operating cash flow, CZK 5.6 billion. CapEx similar to last year. I think it's important to look at Slide #3, where you can see an explanation of why our quarter 1, 2021 EBITDA is lower than 2020 by CZK 5.7 billion. And basically, all segments are doing better than last year with the exception of 3 items. One is actually generation. In generation, there is an effect of, interestingly, lower prices that we were achieving during the COVID situation last year when forward prices actually went down during end of first and then during summertime. But mainly, there are 2 factors that were extremely positive in 2020 and that we are missing and cannot be repeated in 2021. So from an operating point of view, nothing has gone forward, not at all. And those 2 things will be just now explained. In trading, we achieved, in 2020, CZK 2.6 billion higher income than in the first quarter 2021. This is quite unusual. Actually, last year, trading result was very strong. And we totally earned CZK 3.8 billion, and majority of this amount was actually earned during first quarter. Why? Because actually, first quarter of last year was heavily impacted by COVID. There was a very high price volatility on the market. Nobody knew what to expect. All of you remember when actually markets were not collapsing then going down very quickly, not only equities, but also commodities. And this volatility actually helped our trading team significantly, and they made so much money compared to Q1 2021 when we don't see such a volatility. So not much space for such an extraordinary earnings. Specific temporary effect, CZK 3.8 billion, again, mainly due to COVID situation when spread between Czech and German price has opened up. And our hedges of Czech power prices that are actually done through German power exchange were no more effective. And ineffective -- or inefficient part of the hedges had to be reclassified into P&L and reclassification into P&L meant that those actually had a positive effect. That disappeared over time, over second through fourth quarter of last year, but actually materialized as a positive in the first quarter 2020. So those 2 effects together are more than CZK 6 billion, which is actually more than a negative variance between Q1 2021 and Q1 2022 -- 2020. So from operating point of view and EBITDA generation point of view, we are doing very similarly. We are on our target, and that's why we also confirm our target EBITDA expectation of CZK 57 billion to CZK 60 billion. So going to next slide. Here, you can see actually all items behind -- below EBITDA, depreciation, amortization and impairments, which are CZK 1.6 billion higher. It mainly relates to asset impairments in Bulgaria and Romania, which is caused by the effect of Romanian companies actually, and the profit that belongs to the sellers. Then other income and expense -- to the buyers, buyers of our assets. Then other income and expenses, CZK 0.8 billion positive breakdown is again in the detail provided. Then we have lower income taxes. And finally, we get to net income of CZK 8.4 billion. Of course, the variance of CZK 5.8 billion on net income and CZK 5.5 billion on adjusted net income is fully attributable to lower EBITDA, which is lower due to those 2 effects that I just described on previous slide. On the next slide, important information about our emission intensity, especially these days when carbon credits are over EUR 50 per ton of CO2, we need to disclose this information to you. And as of 2020, we actually got below average CCGT plant that, as I mentioned, a factor of about 0.75. Our overall portfolio was 0.33. For 2021, we plan actually 0.28, so decline of 15% on a per megawatt hour basis compared to 2020. On the next slide, you can actually see the information on our sale of Romanian companies. As of end of first quarter, we actually disposed all 7 businesses, distribution sales and renewables in Romania. We received almost CZK 25 billion or roughly EUR 1 billion. The proceeds will be used for 3 purposes. One of them is reducing financial debt that needs to be reduced because of lower EBITDA. As we sold our EBITDA, we will also need to reduce our debt so that we keep our debt-to-EBITDA ratio flat. Part of it will be used for developing new ESCO services, acquisition of ESCO companies and also renewables, mainly in the Czech Republic. And ESCO, mainly abroad in German market. And we will also use part of the proceeds to pay higher dividend that we wouldn't normally pay to our shareholders. We also went through liability management program. We kind of get asked why we actually paid some debt. Now it has a good reason because when you -- as you know, interest rates on euros are negative. So keeping euros on our bank accounts means that we are charged interest expense. And at the same time, we would be paying interest to our bondholders. So it only makes sense actually to go through liability management. We managed to buy back about EUR 470 million in euro and dollar bond issues or equivalent of CZK 14 billion. And if situation looks like it's planned, we would not need to refinance our bonds that are maturing in 2021, and we will use our current cash and cash that we will earn to repay those bonds. We often get asked also why don't we raise new debt that is now cheap and might be more expensive, which is true. But on the other hand, we really don't need funding now, so raising that when you don't need it, is not the best thing to do. Then Bulgaria and other countries. In Bulgaria, we expect the transaction to be settled by the end of this quarter. In the meantime, we managed to negotiate with the buyer that we will pay a dividend of EUR 25 million on top of the sales price that will be paid to us. Then we also proceeded with international investment arbitration against Republic of Bulgaria, which is not being sold. So even after we sell our assets in Bulgaria, we will still continue in arbitration against the Republic of Bulgaria. Then Poland, we expect to sell our Polish assets by the end of this year or beginning of next year. We are -- the binding bids are due actually during second quarter. And we will see what they are, and how the process will move on after we see them. Then we also announced the date of a general meeting. General meeting will place -- will take place in Prague on Monday, June 28. And we will also announced approved our present proposal of the Board of Directors regarding dividend actually next Thursday on May 20. We have also some news in the nuclear industry that you can actually read through, and we created in Slovakia, a joint company with Slovak SPP, which is 50-50. 50-50 business between ourselves, where we actually put into this structure our companies in ESCO and SPP has put cash. So -- and we have a managerial control over the 50-50 company. Regarding COVID, we are doing our best to protect our personnel, testing daily up to 8,200 tests per week. We also test plant employees and contractors, especially nuclear plant up to 1,000 tests a day. So trying to protect everybody. And hopefully, the situation [indiscernible] is getting significantly better compared, for example, 2 months ago. And that's, I think, the main news. Now I will hand over to Pavel Cyrani, who will discuss details of sales and distribution segments. And then I will come back to generation mining.

Thank you, Martin. I will go through the individual business segments. Let me start with the sales segment. I will make a comment, which may not be apparent at first sight, but I think we should have it all in mind. We are seeing growing electricity prices over time. We see them growing extremely in the recent days, together with the CLT allowance. However, we must not forget that 2020 there was actually a drop in the forward prices. So actually, if you compare the level of price -- electricity price that we were able to achieve for 2020 being sold in 2019 compared to the '21, sold in 2020, '21 is actually more impacted by the low COVID prices of last year than it was the previous year as we sell on the forward basis. So this is something that we need to keep in mind. This was actually extremely amplified during Q1. The Q1 prices in the preceding months for Q1 2020 were EUR 10 higher than the Q1 prices for 2021. So please bear this in mind because some of the effects or most of the effects of the rising prices, together with the CO2 allowances, which are internal, a good news for us, have a positive impact on our results will only materialize over time, not necessarily in Q1 of this year or 2021 as a whole. So on this front, what you will see is that the sales business actually benefits from lower prices because it allows for increased margin as the retail prices do not react as quickly to the wholesale prices. So the effect of lower prices in 2021 is here displayed as an increase for the CEZ sales business. In terms of retail, what we also saw, as you see on Page 12, is higher volume by 14%, both in the natural gas and electricity, Q1 of 2021, on average, was a colder month. Later, when I comment on distribution, you will see that there was some increase year-on-year even adjusted for temperature, but majority of this growth comes from lower temperatures in this winter. In terms of energy services, we are already seeing some recovery after COVID, although Q1 2020 was not a quarter that would be fully hit by the lockdowns. It was only later in 2020. But still, we are seeing some signs of recovery, see that we have a 2% year-on-year revenue growth, higher in Germany than on the other markets. For the full year, we expect about 8% year-on-year revenue growth. Now as for distribution, distribution is basically driven by the -- by similar drivers as the retail business that is the growth of electricity distributed, driven by colder winter. That's the #1 effect for Czechia, which you can see on the next page, where electricity distribution is growing 4% year-on-year across all segments, about 16% for the households and going down for the large end customers. What needs to be noted that for the households, basically 90% to 95% of the distribution charge is driven by the volume of electricity, whereas for the larger customers, it is not driven so much by volume, but rather by the reserve capacity. So this minus 2% and 16% translates into the 9% growth of Czechia distribution sector. You see also that temperature and calendar adjusted, the growth is about 2%. What I need to say is that, especially for the more extreme deviations from the standard temperature, the temperature adjustment model is not necessarily 100% accurate, but you see that the #1 driver was actually temperature. And now on the generation and mining, Martin, back to you.

So generation now -- as you can see, the generation now in total is down by CZK 7.1 billion, CZK 6.7 billion of which is in the Czech Republic. And those are the effects that I already described. So CZK 2.6 billion over trading results. And the CZK 3.8 billion, actually lower mainly due to a positive effect of P&L effect of inefficient hedges in our German market, that kind of disappeared by the end of 2020. We also had a negative impact of lower power prices. Our certain higher emission allowances, which was CZK 1.2 billion. We had higher volume, generation volume on nuclear plants, which has a positive effect of CZK 0.8 billion. So that's the main explanation in terms of generation. When we look at generation actually in Q1 on our strategic assets, you can see an interesting picture on Slide 17. We had a year-on-year reduction on coal-fired plants by 23%. We went from 6.2 terawatt hours to 4.8. Main reason is actually a sale of our Pocerady power plant, which accounts for 1.3 terawatt hours. And then we shut down operations of Prunerov 1 plant actually in June -- on June 30, 2020, which is 0.5 terawatt hour, and we have longer outages at Tusimice 2 power plant. We also, at the same time, had shorter outages at Prunerov 2 and Ledvice 3 lignite plants. So overall, 23% decline on coal fired plants. We have a 6% increase on our CCGT plant due to market conditions. 8% increase in our nuclear facilities, which is important, and 17% increase in power generation coming from renewables, mainly hydro in the Czech Republic, where we had enough snow and enough water compared to Q1 2020. We had lower wind generation in Germany, mainly due to weather conditions and outage of several turbines. Maybe look actually at EBITDA of generation segment strategic asset, you have a breakdown by asset type. So zero-emission generating facilities are actually up by 0.7, all coming from nuclear, renewables are flat. Fossil Fuel generation EBITDA is lower by CZK 1.1 billion. Trading, as I said, CZK 2.6 billion lower as there were no significant price movements on the market first quarter 2021 compared to previous year. The detail is provided actually below the table. And finally, mining segment actually pretty flat, pretty much flat higher sales to CEZ Group, lower sales to external customers and some cost savings. So 12% increase from CZK 1.4 billion to CZK 1.5 billion for the first quarter EBITDA. And now I hand over to Pavel, who will guide you through our outlook for the remaining part of this year.

Okay. Martin, thank you. We start with the outlook for the electricity generation by type of asset. Just a reminder that we are now differentiating between the strategic assets as compared to the overall generation. That would include also those power plants that we have either sold throughout this year or are ready to be sold later in the year. The good news is that we are confirming our positive outlook on the growth of nuclear. We also see kind of flat generation for the renewables. We are still waiting for the renewable capacity growth driven by the modernization fund that should launch its first auctions in this first half of the year. We see natural gas-fired generation going up in terms of expectation, driven by the dynamics in the market. And finally, and as was already mentioned, we confirm that coal-fired generation will be going down. It's a combination of sale of some stations, termination of others and also driven by the kind of pure dispatching adjustments driven by the very high CO2 allowance prices. What will be seen later is that the contribution of the coal-fired generation with CO2 prices at above EUR 50 is so low that this does not translate into a significant impact on the economic profits of CEZ. With this, on Page 22, we confirm the outlook for the full year of EBITDA at CZK 57 billion to CZK 60 billion. What we have precised here is the impact of assets for sale on the basis driven by when exactly these assets are still consolidated, and when they are already not part of CEZ profits. And with that, adjusted net income of CZK 17 billion to CZK 20 billion. There's a more detailed breakdown in the appendix. Kind of segment by segment, I think, given that this was commented on the last call that we had -- I will not repeat it here. But we are kind of happy to confirm the outlook. So please, let's not be misled by the Q1 results that were largely impacted with things that kind of disappeared or were not accounted this way in the full year 2020 and, therefore, on the full year comparison, do not have any significant effect. On the next page, you see the development of the EBITDA and the contribution of the different segments year-over-year. What you should recognize is that mining, combined with fossil fuel generation contributed 16% last year, out of that 10% that was the fossil fuel generation. Now the effect or the contribution to 2021 is 3%, which kind of brings me back to the reiteration that overall CEZ is very positively geared to the rising prices driven by CO2 on the nuclear and renewable. And also on the targets in kind of smart grids and energy efficiency on the distribution and sales and supply business. The final page shows how we are hedged. It is a little more complicated than we have been showing in the previous quarterly results calls. The reason is to give you more detail and more flavor as to how we target -- or how we perform our hedging strategy. You see that for next year, we have sold 30 terawatt hours of electricity at EUR 47.3 on average, and we have acquired or hedged 8.7 million tonnes of allowances for 23.5%. Also in the table below, you see that we are, as of today, 69% hedged for the nuclear and 56% hedged for the fossil-fuel sources. The different percentage is not driven by the fact that we would want to have a different percentage just by definition. The fact is that we do not treat this way, mainly our gas generation. And therefore, the percentage for those power plants that is hedged is obviously the same then for nuclear and lignite. I have to say that we are now reviewing the approach to hedging, especially for the -- for lignite and for the future years because if you would look today at simply the screens of the power markets, you would notice that I think it was for 2024, there's a EUR 2 clean power spread, which obviously is not something that we would like to -- or it makes sense to hedge. Actually, it would not make sense to actually run power plants at this spread. So for the lignite, we'll need to -- we are just developing a more flexible hedging strategy to make sure that we only dispatch them at times when it is profitable. We do not intend to change the hedging for -- or make it more flexible for the nuclear. We are actually -- we will be continuing with the hedging of nuclear the way we have done so far. And we believe that this overall will yield the best results for the company and its profits. So I think this is it from the presentation. And we are ready for questions.

[Operator Instructions] The first question is from [indiscernible] Morgan Stanley.

I have 2. The first one is, I was wondering if you could comment on any potential impact that you would have on your nuclear profitability coming from rising uranium prices? And my second question is, I was wondering what could be on your side, the course of action to be taken if clean spot spreads, and well, lignite spreads keep deteriorating?

So uranium prices don't have much effect. This uranium price is a very marginal part of nuclear fuel cost. Absolute majority of the cost of nuclear fuel is actually labor and manufacturing that is devoted to turning uranium into nuclear fuel. And nuclear fuel as such has a relatively low cost compared to any other part of any other fuels. So impact of uranium prices themselves are basically marginal.

In terms of the clean lignite spreads? Well, we would see 2 types of dynamics. One is, obviously, there would be less lignite power stations dispatched in the country. Obviously, as I've already shown that the contribution this year, not even the years that are coming. It's only 3%. The effect is by now marginal. At the same time, there would be a second good dynamic that is a lot of the prices are -- in the region are basically driven by the German dynamic. However, there are limits to how much electricity can flow from the German market or the kind of the broader central European market, including Germany. So I think I would expect that if the very low clean lignite margins would prevail, they would actually recover somewhat in the Czech Republic by the Czech German spread increasing again because at times, simply, there would not be enough capacity for the electricity to come from the cheaper markets. And we would need to dispatch our stations anyway, and that would drive this dynamic. This -- how this actually plays out? It's not like that it plays out on average. It plays out in the specific hours. What we see in the market, you see a lot of hours with zero or actually negative prices and then quite some hours with very high prices. So this is kind of how it plays out. So if there would be more hours with prices where the spread between Czech Republic and Germany would grow again. So this is what we expect.

The next question is from Bram Buring of Wood & Company.

This is Bram Buring from Wood & Company. I'd like if you could go back to Slide 5, please. I have a question regarding to what extent CEZ is positively geared to the CO2 price. So as I've always understood it, we should be looking at the level of the marginal power plants in Germany and the delta between CEZ's emission factor and that's for the upside from the power price -- sorry, from the CO2 price. But you're presenting here the emissions of the new CCGT plants, and how you outperform relative to those. So my question is, in light of this, exactly what is the level of upside that CEZ generates from higher CO2 prices, please?

Thank you for the question. Simply said, CEZ is positive -- is positively geared. And last emission of marginal power that we observed on the German market was the 0.55, whereas ours was around 0.3. So the difference of about 0.2 was something where we benefit from the price -- from the CO2 increase. Obviously, you will then ask how come then if we see electricity prices growing, the effect is not positive in some. And the answer is kind of threefold. There are also other things that in the short term, play in the game. Number one, number -- such as that, for example, simply the Q1 of 2020 was EUR 10 lower than Q1 of -- 2021 was lower by EUR 10. And this is simply kind of like dynamics in the market. People -- at the end of 2019, the world was still very rosy and everybody was expecting growth, and there was a very little talk about COVID. And now at the end of 2020, everybody was in despair, second waves were coming. So there's a lot about this which in the long-term or longer term, do not affect or they kind of even out, but in the short term, can impact the market. The second dynamic that we saw in the market was the fluctuation of the Czech German spread. In the first half of last year, there was a spread of up to more than EUR 4 versus today, we see spread of about EUR 1.5. This is actually driven by all kinds of things, including technical capacity of the network, the amount of wind production, which typically disconnects these 2 markets and also the demand and supply in the market. So again, if this year we would assume stable you would see the direct impact of this benefit, but it can play out for -- in the short-term or for some interim period of time, it was -- you don't see this positive gearing that we have. But as I said, we are positively geared. The more actually lignite, we either disconnect or we don't dispatch because of high CO2 prices, then we are basically more positively geared because we are effectively have nuclear and renewable, doing basically 100% of the profit from generation. But I understand that you cannot see that in the Q1 results, but I'd like to reassure you that it is there.

Thank you for the detailed explanation. I'm rather less bothered about the first quarter than I am about -- well, CEZ share price performance. It does not seem to me that the stock has been trading as a CO2 price proxy, as it has in past years. Have you got any thoughts about that, please?

Well, I'm not trading the stock. So I think this would be more a question for the stock market. But I would assume, and we have been observing that some of the market players have introduced pretty strict regulations as to what stock they are even willing to buy and trade driven by, for example, not having any coal production and so forth. I do -- I'm aware of some funds that basically said they would not invest into stock that has coal in it. So this may be a part of the answer that simply the market -- to some degree, irrespective of the financial results, outlook, cash flows and so forth, favors the green, even if it has no profits over something that is considered not green.

On the other hand, actually, if you look at the power prices development in the past few months and our stock price, the correlation is almost perfect. I mean it's really one to one with power prices. So I think the market kind of still can see us rightly as a function of power prices.

Agreed. It's very true. So for modeling purposes for '21, I should be thinking about the delta between the marginal plant, which is 0.55 and that 0.28, you expect to have as an emissions future this year as being the correct level of upside that CEZ is seeing from CO2 prices?

Yes. However, adjusted for the amount that have been already hedged.

Yes, yes, yes. Understood.

I'll just make one comment because as you are asking, everybody is thinking, well, the prices are rising. But I just made the point that actually, the forward price for 2021 sold in 2020 was lower than the price for 2020 sold in 2019. So actually, although we are now -- everybody has in mind rising prices, there was actually a bid, the prices went down last year for this year. And so we are impacted by this. And what you see today on the screens is prices for years 2022 and on.

The next question is from Piotr Dzieciolowski of Citibank.

I have 3 questions, please. The first one would be on the lignite. Given the spread is getting so narrow in the future years, and who knows where the CO2 goes from here. But would you consider early shutdown of these assets or maybe some kind of an asset transfer to state or some other way to basically eliminate it from your business model, the ownership of the lignite fleet? So that's the first question. Second, can you give us an update on the Bulgarian disposal? I know there was an issue about the funding of the potential buyer. Has this been resolved? And is it close to be completed? And finally, on the dividend, how do you think about the kind of a potential special dividend in light of rising power price environment and your kind of relatively light CapEx program in the future years?

Well, in terms of our lignite assets, we do have a plan of decommissioning some of the assets or actually eventually all, but in the short term, some of the assets anyway. I think, as we mentioned, that if you look at the screens and you see a EUR 2 clean lignite spread for 2024, this is not a level at which these assets could be operating. So we will be following this very closely and trust me that already today, there are teams looking at how to work with the capacity, both on the power station side and also the mining side to be able to quickly adjust the available capacity with this also -- not only the variable, but also the fixed cost. So we would not -- probably not make money, but prevent any loss of money that would come from this.

Question 2, the Bulgarian disposal, you are right. I think everything has been approved. We got all the clearances [indiscernible] clearance. I know others that are needed, and now actually, the only thing that is left is the settlement of the transaction. Buyers are gathering the plans together. And our expectation is that this will be done by the end of this quarter. So we will see by the end of this quarter. Dividend. Dividend, I think it's really something that we already mentioned in March that we are planning to pay or use part of the Romanian proceeds for the dividend payment. So higher payout than we would normally have. A normal payout is 80% to 100% of net income for past years, so it could be more. And our proposal will be presented next Thursday. So next Thursday afternoon, you'll get to know what the proposal is.

- At the moment, there are no further questions. [Operator Instructions] We received a follow-up question from Bram Buring, Wood & Company.

I've been looking at your plan -- this is in relationship to the lignite phase out and the greening of the portfolio. But CEZ has significant financial resources. The government is agreed now to finance 100% of the construction of the new nuclear units if that, in fact, at the end of the day does go ahead. But given your size, and I understand the opportunities in the Czech Republic are limited. But given your size, is it -- it seems to me that your pipeline of renewables projects is rather modest. Would you disagree with me? And can we look forward to you putting forward plans for a much larger pipeline of green projects sometime in the future.

I think there are 2 parts to answer this. And I think you are right that what has been communicated is, in fact, modest. It was up to now, partially driven by the fact that the financing scheme for a new renewable restart in the Czech Republic was still being prepared. Now we have already applied with a large number of projects to like a pre-round of the modernization fund and are preparing projects for the actual real application. At the same time, I think it is a correct point that we should then announce this or specify this a more kind of mid- term to long-term outlook, of what we see for the renewable market in the Czech Republic. And not only the renewable market, but in general, what will come on top or after -- or next to lignite, wherever you want to place them, we are preparing for that.

Okay. So it's correct to assume that your plans for renewables are not just limited to the Czech Republic that you other have -- you have other markets -- developed markets primarily that you're going to be looking at. Is that the correct understanding?

I think -- look, there are 2 parts of renewable market. One is kind of the larger installations like on ground field. And those who want to primarily focus on the Czech Republic, at least kind of in the first stage. At the same time, there's also a lot of renewable being developed for customers as a part of the Energy Services business, and that is also kind of taking off. And that we already naturally develop across countries, and we will be specifying this over time.

There are no further questions, I would like to turn back to you.

Okay. So thank you, everyone, for joining. If you have some other follow-up questions, just do not hesitate to contact Investor Relations. And have a nice rest of the day and be safe. Thank you.

Goodbye.

Thank you. Goodbye.

Goodbye.

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