CEZ, a. s.

Quarter 1, 2023 conference call. It's my pleasure to invite here Martin Novak, Chief Financial Officer; Pavel Cyrani, Chief Sales and Strategy Officer.

They will start with the presentation, and then I will give a room to your questions. Now all the participants are in listening only mode and we can start with the presentation right now.

I'm handing over to Martin.

Good afternoon -- good morning. So let's start on Slide 3 of our presentation with our financial highlights.

So you can see our operating revenues went up by 23%, mainly driven by growth of power prices year-on-year. Our EBITDA is down by 26% and it reached CZK 32.5 billion and net income and adjusted net income, CZK 10.8 billion which is down 60%.

Our financial outlook for the year is being narrowed. So we are actually narrowing down our range of EBITDA and also adjusted net income.

So our new estimate actually CZK 105 billion to CZK 115 billion. In the past, it was CZK 105 billion to CZK 125 billion.

Net income adjusted for extraordinary effects is narrowing down as well. Originally CZK 30 billion to CZK 40 billion, now CZK 33 billion to CZK 37 billion.

We also announced the date of our annual meeting, which will be held in Prague on June 26. And important, we also announced proposal of the management of the dividend of CZK 117 per share, which is record high dividend.

Record high ever. I think our record dividend was something like around 2010, '11, and it was CZK 53 per share.

So we announced this in the morning and actually during early morning, the Ministry of Finance, as a majority shareholder published their news that -- the press release that they will not -- they will not suggest any other amount. So they actually are happy with this dividend.

So on the next slide, you can actually see main changes on Q1 EBITDA year-on-year. There are 3 big variances or 2 big variances actually on EBITDA and one on net income, further on.

The largest one is called specific temporary effects of 2022, CZK 7.4 billion negative. This relates to basically extraordinary income that was realized in 2022 as part of our liquidity issues that we actually were working on last year, as everybody else in the sector due to margin requirements or rising margin requirements.

We had a few transactions, for example, sale of carbon credits that we would not normally -- not sell, and we would consume them through the year. Now we sold them actually last year during first quarter and realized gain more than CZK 4 billion, which, of course, is not repeating itself.

We then have a few other derivative revaluations that are positive in 2022. We have also CZK 4.6 billion lower income on trading activities, partly because some of the trading results are actually going into P&L of future years.

And generally, with lower volatility, of course, the trading result couldn't be as high as it was in the times of the very high volatility last year. Mining CZK 2 billion positive effect from higher demand for coal and mainly higher prices and sales business, CZK 1.5 billion negative mainly due to seasonal impacts, actually, and that most of them will cure themselves by the end of the year.

So CZK 32.5 billion is the final number. On net income front, all numbers are fairly similar, what's definitely worth commenting is actually income taxes.

Our income tax is actually higher, double compared to last year. And the main reason actually in this sector is actually windfall profit tax that was introduced starting this year.

So CZK 9 billion is actually related to windfall profit tax. It's also worth commenting actually payments that we pay above price limits on mainly nuclear power.

And this is why we don't see any significant uplift in EBITDA. Positive impact in EBITDA from generation from higher prices was about CZK 11 billion, but actually special levy on excess prices is actually compensating that with CZK 10 million.

So comparing quarter-to-quarter on EBITDA, I would say that there is a high effect of power prices compensated by the levy on excess revenues. Then we have lower income from trading activities, partly due to quarter 1, 2022 extraordinary revenues.

And we also have CZK 9 billion of extra charge on income taxes. Next slide, you can see actually the financial outlook that I already talked about.

So narrowing it down both for EBITDA and adjusted net income. On the Slide #7, you can see the dividend per share and payout ratio.

We actually proposed as we a few times actually suggested in the past, payout -- dividend on the top of the range of our payout ratio, which is 60% to 80% taking into consideration our CapEx needs, investment needs, financial investment needs into school businesses and our financial condition, we believe we can afford to pay the dividend at a higher level of the range. So CZK 117 per share is a proposal.

And we actually received the news as all investors today in the morning that state is fine with this proposal. Generation and Mining on Slide #9.

Actually, there's more of a detail of what I just discussed. And clearly, from this slide, you can see that actually our nuclear EBITDA is actually down compared to previous year, and that's because vast majority of the levy that is paid above price caps is actually related to nuclear because the power price from our fossil-fuel generation is below this cap -- this price cap, and that's why we can see actually 43% growth in fossil-fuel generation EBITDA.

There is also a line on trading that I already described and special temporary effects of CZK 7.4 billion negative. On next slide, you can see mining, again, higher prices and mainly higher coal supplies to the group of CZK 1.5 billion external supplies, CZK 0.9 billion compensated by higher expenses related to the mining activities.

So EBITDA has grown -- doubled year-on-year. Mining volumes are somewhat similar to quarter 1, 2022.

So it's actually a function crisis. On the following slide, you can see actually nuclear and renewable generation.

It's important to look at full year numbers. So we expect slight decline actually on nuclear mainly due to longer scheduled outages or refurbishments compared to previous year.

We also plan increased power generation from renewables, mainly due to hydro conditions in the Czech Republic and overall, we should end up at negative 2% of power generation, 33.7 terawatt hours. On coal and natural gas.

Full year, we actually don't estimate natural gas generation because it is really the plant that is peaking plants. So it's difficult to estimate how it will be run.

So far, we produced 0.6 terawatt hours from natural gas. We had a decline actually in Poland and Czech Republic, mainly due to market conditions that did not allow to run the plants fully.

And we also expect decline actually on a year-on-year basis. We are meeting our environmental targets that we announced, which you can see on Slide 13, both for SO2 and NOX.

We are doing better, and we are actually in line with our planned amounts of emissions. On the next slide, you can see actually our hedges.

So you can see how much -- as of 31st of March, how many emission carbon credits actually or emission allowances we have purchased and same with power, how much power is actually sold, what is the open position, so basically open position on both electricity and carbon credits is reflecting each other, so around 10% open position on both commodities. Important numbers are actually below those charts where you can see average achieved estimated prices actually for both commodities, so purchase price for carbon credits and sales price for electricity.

You can also see hedged volumes and average achieved prices, again, both for electricity and also contracted emission allowances for 2023, we still have about 10% of power or we had 10% of power unsold as of 31st of March. And we are already 53% sold for next year, 29% for 2025 and 7% for 2026.

We have reestablished hedging basically the way that we did it in the past after a short break during last year's liquidity, nervousness on the market. Now I think we are back to standard way of hedging.

So that's all for me. And now I will hand over to Pavel, and he will go through distribution and sales segment.

Well, thank you, Martin. Let me quickly go through both of the segments.

On Page 17 is our distribution segment with a minimum year-on-year variation where we do see a drop in electricity distribution driven by the savings on the side of customers driven by high electricity prices. You see the impact on the residential customers being the largest and large customers being the second.

Obviously, in terms of CEZ Distribuce, this effect, if any, is temporary and is then kind of compensated with the correction factors in the following year [indiscernible]. On the sales side, Martin already touched upon it.

We have reported quite a low number for the retail. The effect that has been with the company always, but was never so upper end is the fact that we charge an annual average price for the customers the same, whereas we purchased the electricity.

Obviously, then there's higher consumption and higher prices in the winter. The average accounts for it, but we charge it in such a way that we make a lower margin and with like extreme prices for the winter of 2023 which we [indiscernible] behind us.

This effect is exaggerated. Overall, we do expect somewhat lower result for the retail segment year-on-year, but definitely positive, and this will -- the negative effect of the first quarter will be caught up with during Q2 and Q3.

In terms of the B2B segment, there the results are in line with expectations, Energy Services growing. And actually, commodity sales showed up.

This is driven by 2 things, but the main one is by procuring electricity from the renewables where we were able to procure it at stable prices and resell it at higher prices. In terms of supply of electricity and , you see on Page 19.

In line with what you saw in distribution, which more corresponds to the overall consumption. Here, it's obviously also driven by the number of customers.

You see that the drop in electricity supplied is somewhat lower than for the distribution because it is partially offset by the growing number of customers. At the same time, this was the Q1 and what we also see is that right now, the competition is somewhat tightening in the market with the stress and panic kind of going down.

So we will have to keep -- again keep focused on retaining and acquiring new customers going forward. On Page 20, you'll see the revenues from sales of Energy Services growing.

I think there are 2 things, one is the business is going well. More and more companies are interested in either reducing their consumption or changing from gas to other types of energy such as electricity.

At the same time, it is also driven by the inflation driven by the fact that simply the individual items are more expensive. And with this, I think we are finished and [Indiscernible].

[Operator Instructions] The first question is from Arthur Sitbon.

It's actually regarding the potential group reorganization/potential nationalization. I was wondering if -- well, with the AGM coming, I was wondering if there would be any prerequisite from the government to communicate anything before the date of the AGM, whether it would be on the potential nationalization on the reorganization?

And my second question on the same topic is in terms of potential group reorganization, has there been any work done by CEZ as a company independently from the government and what could be a corporate structure that according to you could look optimal or that could be good.

Okay. I'll start with the second question, and that is, as we've discussed even on these calls previously, we are obviously looking the internal structure from 2 perspectives.

One is achieving the biggest synergies and avoiding dissynergies. But even more so adjusting the structure in such a way that we can obtain financing in the best possible way because obviously, with the biggest growing segment being the clean energy and kind of new technologies and so forth and so on.

And those being from the financing perspective and under the same balance sheet as the coal stations, it limits our access to banks. So we are looking at how to best reorganize internally in such a way that to summary we would have 2 balance sheets from the bank's perspective and we could attract both green banks for the new business and those banks are willing to help us to transform the lignite business too.

There's no more detail that I could provide you with. But this is kind of the internal work once it's finished and decided, obviously, we would communicate that.

In terms of the government perspective, obviously, I don't have any information to provide you with on this one, you would have to direct the questions to the government or wait for the government announcement. I have no news on that.

Just a follow-up. One, you were mentioning that when your internal work is over, you would communicate that.

Is there any time line that we could reasonably expect on this?

Not at this moment.

Okay. So the next question can be asked by Piotr Dzieciolowski.

Yes, we can hear you.

Can you hear me, it's Piotr Dzieciolowski from Citi.

Yes, we can hear you very well.

Okay. Okay.

So I just wanted to ask 2 questions really. The first one would be a potential split.

So just theoretically speaking, if I wanted to make a split of a company and save them money not to make a tender for the entire company. Would you be in a position to sell nuclear reactors or the lignite assets to the government directly, and therefore, that would not require the tender offer for the whole company.

That's the first question. So I'll let you answer this one first.

At this moment, we don't have any information to provide on that. This is really the decision on the shareholder level and obviously, the majority shareholder being the government, you would have to ask the government.

We don't have any more information to provide you with at this moment.

Okay. Then that means I don't have a second question.

Just maybe trying to understand your numbers. If you can please tell us with this windfall tax profit at the moment, what is your real sensitivity to power prices for the next 3 years in terms of earnings.

It must be substantially lower, I would assume.

Yes, it is on the level of the net profit, it's extremely low. On the EBITDA, its semi-low, so it is lower.

I don't know like in what kind of numbers you would like to express it. I don't have any specific numbers on the top of my head that I could share with you, but it is low.

Our estimate is -- our full year estimate is actually CZK 30 billion to CZK 40 billion, both on the levy on the cap of our power prices and windfall profit tax for 2023. We don't have any power caps for 2024 and '25, but we have windfall profit tax.

And actually, for very -- for simplicity, you can use effective tax rate of 70%, corporate income tax rate of 70% and apply it on pretax profits, and you will be pretty much correct in your estimates.

Sure. So what you say is that your guidance for '23 is that next 2-year profits won't be far from this level, right?

[Indiscernible]

[Operator Instructions] Okay, we have one from Peter Bartek.

Okay. So maybe if you can provide some update on the ongoing nuclear tender, what's the status?

So what's the time line? And whether you as the management would see the restructuring as a condition to finalize the tender and to sign a contract with the supplier.

Well, okay, let me answer that the tender is going according to the plan with the main milestones being the updated bids coming in the third quarter and then kind of selecting our proposal of the selection from the tender by the end of the year and then the contract signature next year. In terms of the connection, we don't see it that way.

The financing for the first unit, Dukovany, is -- should be based on the scheme that was introduced on the government financing and offtake PPA. And then this is -- the work on these contracts is run in parallel to the tender cell.

So this is what I can say to the running tender.

Okay. So for the Dukovany, the scheme agreed with the previous government is kind of still in place.

And understand correctly, so it would be SPV and the financing would be available even without restructuring.

For 1 unit, the contract that we concluded is active. It's a concluded contract and that this contract assumes to be superseded by the financing and offtake contracts.

Next question comes from Alexander McDonald.

I just wanted to clarify on the timing of the restructuring. If there is any -- if you can give us any clue when are we going to have any type of news?

Or if internally, you have any deadline. And then with regard to the -- in the first question that was asked, the corporate structure, you said you're looking with the banks, if you can have the 2 balance sheets.

Can you just clarify the activities that would go on the 2 balance sheets that you were mentioning? So how are you thinking about the allocation of the different businesses in which you are involved.

Look, thank you for the question. I totally understand why we're asking it.

Unfortunately, at this moment, we don't have any more detail we can provide you with. We are looking at things, and we don't want to comment on any things that are not fully kind of finished, analyzed and approved so not to cause any confusion.

So once it's done, then we will we will announce it. Obviously, you do understand that.

Normally, we probably spent last year working on it one way or another in line with our clean energy for tomorrow strategy, but we dedicated all the capacity to other topics around security of supply and so forth and so on. So that's why I don't have any more details at this moment to provide you with.

Okay. So it seems there are no further questions at the moment.

So thank you, everyone, for taking part in this call during today's very busy day. If you have some further questions, later on, do not hesitate to contact Investor Relations.

Thank you very much, and bye-bye.