CEZ, a. s.

Hello everyone. Good morning or good afternoon and welcome to ČEZ's First Half 2021 Results Conference Call.

Let me introduce today's speakers; Martin Novák, Chief Financial Officer; and Pavel Cyrani, Chief Sales and Strategy Officer will walk you through the presentation which will be followed by Q&A. I'm now handing over to Martin.

Good afternoon. Good morning everybody.

So, let me guide you through the first part of presentation. And we will start on slide three where you can see our financial and operating results for first half 2021 compared to same period of last year.

You can see that our operating revenue went up by CZK2 billion or 2%. EBITDA is down by 18% or CZK7.1 billion.

Net income down by 89%, but that's because of one-off item that I will explain later on. Adjusted net income reached CZK11.3 billion or 31% lower than last year and it's very similar with operating cash flow.

You can also see some volumetric metrics in installed capacity and so on. Then it also include actually our foreign assets that we partly disposed.

I'm talking about Romania and Bulgaria. So, it's probably better to look at in the later part of the presentation at so-called strategic asset where we show very similar table and we will get there later on.

So, comparison on a year-over-year change in EBITDA was affected by a few temporary effect. It's about CZK3.9 billion in generation segment.

So, our EBITDA went down by CZK5.5 billion on strategic assets compared to last year, but 3.9% are actually of items or items that will cancel themselves out by the end of the year. The most significant item out of those CZK3.9 million was actually it's also called overhead or non-efficient part of the hedge that was booked last year as a profit due to difference between Czech and German market prices temporarily also instead of flowing through balance sheet, it flows through P&L just because the hedge was not efficient and that was a positive effect last year.

So, of course, we don't have it this year. So that looks like a negative effect this year.

We also have revaluation in derivatives and generation hedging contracts where some of them have to go through P&L as well and that's basically the remaining part. On trading activities, we are down to CZK0.2 billion versus last year where last year was probably the best year in our history.

So, obviously, difficult to repeat every year the best year. So, we are positive from our trading activities, but not as much as we were last year.

Generating itself, we have a negative impact on emission allowances and natural gas prices and the exchange rate in our books compared to last year. In mining, distribution, and sales on the other hand, we have positive results.

We are doing better than last year in all of those segments both -- especially in distribution where we have higher electricity distribution volume, we are back on our 2019 levels as you will see later on. And also in sales, we had a higher-margin on commodity sales in the Czech Republic.

On the strategic assets, we are at 2.8% versus 4.4%. This is mainly caused by the fact that our original plan was that we will keep our remaining assets by midyear by 30th of June, but we disposed those assets earlier by the 31st of March.

So we are missing one-forth of Romania in our numbers and that's the main reason for the difference. When we look at other income and expenses on slide 5.

I think it is worth noting the item that is called depreciation, amortization and impairments. We actually booked an impairment of CZK 0.7 billion related to our mining activities.

And that's the reason for decrease in the net income, accounting net income not adjusted net income because we obviously adjust for this item as it is a non-cash item. And the reason why we reduced our asset base in mining operations is given by the two factors.

One of them is shortening the lifetime of the mine to 2038 which seems to be the date for decommissioning full coal portfolio. So no need for further mining activities.

And also due to relatively narrow spreads on coal power plants with relatively high carbon credit and power prices that do not fully catch up with growing carbon credit. So expected volume of power generation from all our plants is also lower and it makes -- there is an effect of the situation in discounted future cash flows of mining operations.

So when we did an impairment, we reduced the value by CZK 8.7 billion out of something like CZK 13 billion in total. I think about CZK 2 billion is actually land which will not depreciate.

So basically, there is not much to depreciate in the future something like the CZK 3 billion roughly is less the value of a mining company. So that's the most important part of our -- of those all items.

Of course, there are also lower interest expenses due to lower level of debt. And so that you can -- but you can see it yourself on the table below.

Sale of Bulgarian asset, it's a successful story, we disposed our Bulgarian asset as of 27 of July. So we are out of Bulgaria after many, many years, 17 years actually.

We sold the assets to Eurohold Bulgaria AD which is largest Bulgarian publicly traded company. The price was €355 million.

The money arrived at our bank accounts on 27th of July. Shares were handed over to the new buyers.

So now we are out of Bulgaria fully. Nevertheless, arbitration case against Bulgarian state continues and it will be -- it is actually registered at Washington D.C.

with International Centre for Settlement of Investment Disputes. Our claim actually reaches €700 million against Bulgarian state for not protecting our investment in Bulgaria and will take a few years to resolve.

Further slide repeats, I hope you have progress seen many times, European commission draft climate targets where we can see significant increases for the current decade. So on the right side, you can actually see the target reduction of greenhouse gas emissions at least 55% compared to 2005 then our renewable share in total final energy consumption 40% which means in electricity, it will be 65%.

And energy savings EED increased from 32.5% to 39%. Important slide, power prices and emission allowances actually reflect this EU growing climate ambitions.

So carbon credits are around €55. Power price is partly due to this factor, but also partly due to high commodities are reaching actually this slide shows 76, I think now we are above 80 in the Czech Republic on power prices.

On the other hand, progress for future years for example 2023 are significantly lower than for 2025. So the margin is again narrowing actually for future years.

And this is one of the factors why our impairment had a negative result in the generation of coal mining company. In May -- second half of May we introduced actually strategic ambitions until 2030 called Vision 2030-clean ENERGY of Tomorrow.

And as already said on May, and repeated on 22 July, when we supported our vision with numbers. We decided to adjust our strategy and basically develop CEZ Group in accordance with ESG principles.

The main changes or things that are addressed, we will have to stress out because transformation of our generation portfolio to low carbon and carbon neutrality by 2050. Building 1.5 gigawatts of installed capacity and renewables by 2025 and 6 gigawatts by 2030.

Obviously ESCO services and also retail services could be that experience for our customers to the market. We would like to increase our ESG score to 80% by 2023 reduce our emission intensity by more than 50% by 2030 and increased our EBITDA by 40% by 2030.

So that was -- everything that was already said that is also linked to our presentation from July 22, when we provided more detail and numbers. I will now skip following two slides.

It's hard to remind you what we communicated in May and July, but you probably saw it already. And so, Slide 12 where you can see our emission target and reduction of our emissions between 2020 and 2030.

Good news is that today we are way above marginal plant in German territory that is setting the price which is today at 0.55. We are at 0.33 and these days actually a bit lower than that.

On the next slide, you can see our EBITDA expectation between 2020 which was CZK 57 million as announced at that time. And 2030 where we would expect CZK 80 billion to CZK 85 billion.

We are also providing annual CapEx numbers and wholesale prices of electricity today are obviously higher as you will see later. On Slide 14 you can see our CapEx breakdown.

So we will need about CZK 500 billion to CZK 550 billion in CapEx. Some of it will be CapEx that is stay in business CapEx, some will be organic growth some acquisitions.

And this should allow us to generate EBITDA of CZK 350 million to CZK 700 million in total with our debt ratio growing from 2.2x to 3x by 2030. So we are able to finance this CapEx growth and acquisition growth gain EBITDA, new EBITDA and also stay financially healthy which is a very important thing on this slide.

The last slide of this section is important. It provides sensitivity to what we already have shown.

So again, this is repeating our EBITDA moving from CZK 57 billion in 2020 to CZK 80 billion to CZK 85 billion in 2030. And this was based on March prices.

If we look at 19, July prices our EBITDA in 2025 would have been CZK 11 billion higher and in 2030 CZK 15 billion higher. So adjusting for power prices and carbon grid prices that are end of July the picture would be even brighter.

So let's switch to financial performance of business segment. And as I've noted now you can actually see on Slide 17 strategic assets of CEZ Group.

So this is without asset held for sale which was Romania, Bulgaria, Poland. And here you can see that actually all our segments mining distribution and sales are doing better than last year, with the exception of generation, which is down by CZK7.9 billion.

You can also see volumetric data both on electricity generation, power generation, sales, heat and gas. When you look at the strategic segment of generation, assets you can see that our zero-emission generating facilities made CZK0.3 billion more or 2%.

Nuclear basically plus 10.8%. Renewables doing a bit better than last year.

Our fossil generation, which is mainly coal went down in EBITDA to CZK2.5 billion or 45% lower. The main reason is definitely, more expensive carbon credit, carbon allowances and better results last year due to market movement.

Fossil fuel trading result, CZK2.5 billion in 2020 CZK300 million now. And as I said, CZK2.5 billion in 2020 was extraordinary of the record basically and it was achieved due to big volatility on the market due to COVID situation last spring.

Specific temporary effects that's something we already covered CZK3.9 billion. So instead of CZK1.3 billion positive, we had a significant impact on overhead in Germany.

Now we don't have it. And of course, we also had some revaluation of commodity hedging contract of CZK2.8 billion.

So in total, this segment is down by 37% or CZK7.9 billion some of, which will disappear by the end of this year. Electricity generation in thermal towers in and first half, we are down 6% mainly on coal generation from 9.9% to 7.7%.

On coal generation, it is mainly due to the fact, that we sold Pocerady Power Plant as of December 31, 2020 which is 2.5 terawatt hours. We also closed Prunerov one power plant on June 30, last year.

So it was actually fully running in 2020 and we didn't have it in 2021 at all. And we had also longer outages at to Tusimice power plant.

In terms of generation from natural gas, little bit less of power generation there due to growing gas prices. Nuclear facility is doing a little bit better 4% due to shorter outages at both nuclear power plants and four megawatts increase in power output at Temelin Unit two, and renewables are 9% better due to higher hydroelectric power generation.

Estimated power. Our estimate for full-year is actually down by 5% mainly in coal generation there's basically same factors gas, national gas generation we should be again above 30 terawatt hours in nuclear generation and basically flat on renewables.

Emission intensity is important. We often get asked whether growing emission prices and that are not fully formed by the electricity prices are good or bad for us.

So this is clear answer. You can see the current emission of marginal plant in Germany is 0.55.

So this is factored and translates into power prices the cost of carbon credit. Or in some cases it can be CCGT plants.

And you can see that our average portfolio is actually, well below German marginal power plant or even CCGT plants in our region. So by 2020, by the end of 2021, we would like to be at 0.39 it's just a percent reduction.

So that's a slide on intensity and now hedging. For this slide, you can see on Slide 22, the level of hedges.

100% base is actually 43 terawatt hours to 46 terawatt hours which means nuclear generation a big part of our coal generation. We don't hedge for hard coal plant.

We don't hedge, for CCGT on a long-term basis. That's why we only -- and we don't hedge for renewables like photovoltaics because they give a feeling there is only two hedges.

So we are showing the level of hedges and percentages for following years and also average price same for carbon credits that we are hedging immediately within our power prices so that we don't keep open position. You can see also prices of those.

Clearly with power prices being above 80 now in the Czech Republic, anything that we sell actually for future years helps to increase average hedges price for the future, but also increases purchase price of carbon credit. EBITDA of the mining segment.

Mining segment is doing better than last year, mainly due to higher cost supplies to CEZ Group. But on the other hand first half of 2020 was very weak due to industry being shut down due to COVID situation.

So this is basically coming back to standard numbers. We have the decrease in revenue sales to external customers.

We had lower operating cost essentially in our mining activities. So in total, we have made about CZK2.5 billion in EBITDA in the mining segment.

And now I will hand over to Pavel, who will guide you through remaining segments and then I'll then show you our outlook for full year.

Okay. Thank you Martin.

Good afternoon good morning everyone. Both the distribution and the sales segment had a very good first half of the year.

On the distribution side, we saw a 9% increase in the distributed volume of electricity year-on-year, which resulted in an 8% increase in the EBITDA for the Czech Republic. Now for Romania and Bulgaria, which are down in the lower half of the table asset for sale, we already see especially for Romania the effect of holding the assets for only the first quarter of 2021 compared to the full fourth quarter 2020.

The detail on the distributed electricity is on the next page. You see a dip for the 2020, which was the COVID lockdown year and then the economy and the consumption bouncing back for the first half of this year.

And that is even if it's recalculated because we had a somewhat colder winter even if this is taken into account as you see on the right-hand side of the page there is a 7% increase in consumption, it's adjusted for the average temperature. Now for the sales segment, first of all you see a somewhat adjusted structure of the slide compared to other -- the previous conference calls.

We have dropped the segmentation or the structure by country. It's actually in the back half up here you see more by the business line.

First is the retail segment represented by in Czech Republic where we now hold it after the sale of Romania and Bulgaria where we hold it in ČEZ Prodej, you see a pretty significant growth of EBITDA of 43%, CZK0.8 billion driven by two things. One is also the growth of consumption on kind of the standard consumption of the customers.

And we have also booked some extra un-invoiced electricity, which still accounted for the increased consumption in the previous year. As we adjust the models we invoice only once in 12 months.

So we don't have a full clarity of the exact consumption for all the customers at the end of the year. And there are some adjustment made.

And obviously the adjustment or estimation made at the end of last year were somewhat conservative compared to what we now see as the actual full consumption of last year among this specifically the retail the household segment of the customers. The other part is our B2B activities, which have two parts.

One is the energy services and the other is also commodity sales in the Czech Republic. You see all three sub-segments of the B2B segment bouncing back after COVID, specifically the commodity significantly bouncing back the energy services in Germany and other countries the bouncing back.

The Czech Republic is for now stable, because they had a very strong first quarter before the full lockdown being only in the second quarter. But when we look at the full year-on-year, we'll see the growth in this subsegment as well.

Now, the consumption for the retail segment is shown on page 27. You see growth both in electricity, which corresponds to what we discussed for the distribution, but even stronger sales in the gas commodity driven by the colder winter, as I mentioned and also on the gas side by growth of portfolio of customers.

Now in terms of the top line for the energy services on page 28. Here, we see both the first half of the year year-on-year growth 3% and even stronger growth for the full year, because as I mentioned, the first quarter of 2020 was pretty strong quarter.

And the COVID lockdown effected only second quarter, which will then show more significantly in the full year-on-year comparisons. Now, these were the main segments and subsegments which brings me back to the full year outlook.

We have published in May the CZK 57 billion to CZK 60 billion outlook and we are improving it to CZK 58 billion to CZK 60 billion, where we already have a precise number for the assets for sale of CZK 3 billion and we have increased the lower range of strategic assets to CZK 55 billion to CZK 57 billion, specifically driven by the better results of the distribution and supply businesses. And we also have a somewhat stronger outlook for the coal business for the second half of the year, driven by among others the growing prices of gas, which obviously create more demand for generation or based on gas.

In terms of the net profit, adjusted net profit, we made basically the same adjustment increasing the outlook to CZK 18 billion to CZK 20 billion. Obviously, some of the risks/opportunities, we still as always, we'll see how the affordability of the generation assets turns out as well as the electricity prices as we see pretty significant fluctuations and also the fluctuation during the final commodity trading results.

What I have to say is that looking into the books beyond the end of June, we see stronger kind of market fluctuations in July and August and that also drives a stronger commodity trading results. So we may not achieve the record last year, but also don't expect the CZK 0.3 billion that we see on the books now to be representative for the full year.

In terms of the structure, as you see on the last page of this presentation, you see how the business is being kind of -- the segment shares are being readjusted for 2021. We see an increase both of the cornerstones keystone segment, nuclear generation and distribution complemented by supply, and we see a significant drop in the contribution of the lignite assets.

Obviously, this is something that is on one hand negative for the moment, but it also shows that the downside from our kind of operation and ownership of lignite assets is quite limited. And we'd expect, the business to grow on the remaining assets supply distribution and also to some degree with electricity prices, the nuclear generation, which breaks the quite positive growth outlooks that Martin was showing as a part of Vision 2030.

And over to Barbara.

This concludes our presentation, and we are ready for your questions.

It's Piotr Dzieciolowski from Citi. I have two questions, please.

So the first one is on the Gigafactory of batteries, you provided in the presentation the €2 billion CapEx. Can you give any parameters of this investment?

And what is going to be your role exactly in the project? So I mean, the timing the potential contribution?

How do you see the Czech as kind of operating the plant developing the plant and the capital utility will be comparable? And the second question, I have on the European power market.

You say how the marginal emission ratio is 0.55 for Germany. How quickly do you think it will go down?

And so for example, what is the ratio expected by during 2030? And can we really assume the same level of prices as you show in the presentation showing the upside on to your EBITDA target?

I don't remember which slide was it. But I mean is there – any water on your side that's basically cleaning the system would lower the prices?

That's my question. Thank you.

On the Gigafactory, we are in a development phase. The construction decision is scheduled for 2023.

So until then we will not provide too much more information than we have provided too far. Obviously, we would build or we are striving to build a partnership with other partners for such a project.

And the projects as you see for projects such as Northvolt are the projects in Spain typically consists of electricity company, a technology supplier and an OEM typically. And our role in this project in general is the developer of the site.

We are proposing one of our organization site as a site that would be kind of renovated into a Gigafactory somebody who provides the energy services, including a clean renewable energy for the production. And obviously, in the long term, we are also eyeing the market for the second life of the batteries to turn them into stationary batteries.

But it's really kind of a longer-term before there is a significant portion or volume of batteries coming out of electric cars. So this is in general, but construction decision 2023.

Now, in terms of the power market look, it is really difficult to make predictions about electricity prices. That's why we are providing this as a sensitivity more than a prediction.

We see very strong growth of the emission carbon allowances. Obviously, these numbers such as 55, 60 were mentioned as something that the commission was testing their changes to the emission trading scheme, changes that they made.

However, they expected that the changes will drive these prices only after 2025 towards 2030, because as of today, the emission market is still in a significant surplus. Yet, the expectation driven also I guess, by some financial investors, drove the prices up as quickly as within a few months, to something that was expected only to come in years when the market actually balances in physical terms.

So making any predictions on this front is very difficult. I think what is good.

And what is important is that, the commission stays committed to reducing CO2, I would say announcing even higher targets. So I think having asset base that is, significantly positively biased to kind of slow CO2, or no CO2 with nuclear, and increasing share of renewables is something that should benefit from it.

How much and what year exactly? This is something that I cannot comment on at this moment.

No, no. I guess, my question was not about the CO2.

This I can kind of see on the screen where it is. And it's very speculative.

But I was more thinking, if the emission ratio of the system goes down, I don't know to 0.3 next decade or even below that, would you not agree that basically commodities in Q2 will no longer drive the prices, I don't know €280 per megawatt hour?

Look, the case that the emission sector will go down that's right, and how much and how quickly? Again, it's difficult to say as the -- how quickly is what capacity replacement for.

I think a good benchmark for something that the system will need to rely on, for quite sometime is the CCGT efficiency and CCGT emission factor. And so for us getting below this factor is -- and staying there and getting like significantly below is something where we see being rose.

If you're asking vis-à-vis like nuclear stations how much can they benefit from CO2? Well, it's kind of -- again, it's connected because, if you use CO2, as a decarbonization factor with the emission factor or the average emission factor going down, the CO2 prices will need to be even higher to drive the emission reduction further.

So it all depends, how exactly the European Commission will want to tackle emission reduction after 2030.

Understood. Thank you very much.

Hi. It's Robert Maj from Ipopema Securities, actually.

I would like to ask about the dividend. Can you comment what kind of level of dividend would you be willing to pay out from the 2021 results?

And the impact of Bulgarian assets whether we should be expected it to beef up the regular guidance for the dividend? Thank you.

No. So we basically have dividend policy unchanged.

So it is 80% to 100% of adjusted net income, same as in the last year or same as for 2020, which as you said was beefed-up by part of proceeds from Romanian sale. This time we have Bulgarian sales.

So it is one of the options that part of those proceeds could be used for higher dividend higher than 100% for example. But it is definitely too early to tell now.

So it will be a question for our strength next year, depending on our financial position, new development projects, new renewable projects, ESCO acquisitions and all of those things. So it's just too early to say.

So if you stay with 80% to 100% with potential or possible uplift from Bulgarian and dividend that will be the best estimate. But nothing has been of course decided, it's too early.

Thank you. One more question on disposal of Polish assets.

When should we actually expect this process to be completed? Thank you.

We are now analyzing the bids that we received from shortlisted parties. And we would expect that sometimes during third quarter, we will know more third quarter meaning maybe fourth quarter.

We don't know more whether and maybe whom we would continue with the transaction. But now we don't comment on it because we are in the middle of the process.

Okay. Thank you very much.

Good afternoon. I would like to ask you about the specific temporary effects in generation segment.

If I read it correctly you did this kind of effects of CZK2.6 billion negative in this half year. So, we can assume that for the next year it will be actually CZK2.6 billion better in the generation segment.

And what are these effects if you can a little bit elaborate on them? Then second question would be in terms of margins in the Energy Services segment.

If I calculated right, there is 8% EBITDA margin in the first half this year. If it is sustainable or what sort of margin would you expect going forward?

And maybe last question about the coal and lignite production, if you can be a little bit specific about coal and lignite spread? You have I would say refurbished pricing, but maybe lignite spreads and coal spreads will be also useful.

Thank you.

So, the first question was about CZK3.9 billion, CZK0.8 billion is coming from positive results in 2020. And you are asking about CZK2.6 billion.

This is actually a revaluation of certain hedges that did not qualify for balance sheet revaluation. So, they're flowing through P&L.

It will probably cancel out by the end of the year. And of course, it's difficult to predict what will happen next year.

Some of the hedging contracts will always be in the future or might be in the future flowing through P&L during the year, but then canceling out by the end of the year. So, there is absolutely no effect next year, nothing gets reevaluated in comparison with first half.

You will see a positive effect but on a full year basis probably not. Then there was a question--

If I can ask you have the assumption in your guidance that this special effects will be zero for the full year?

That's what we expect, yes. And that's why there is no negative impact in our EBITDA estimates and our EBITDA has actually improved from CZK57 billion to CZK60 billion to CZK58 billion to CZK60 billion.

So, no impact there. Second question related to--

The margins in the ESCO business?

For 2021, our target is between 6% and 7% EBITDA margin. The first half EBITDA margin is not representative of the full year.

It is driven by the fact that these the contract the way they are kind of booked is that they typically -- most of them start in the strength and they are finished before the end of the year throughout they are based on work-in-progress. But in the work-in-progress there is conservative ways to book it and they are fully put into accounting as they are invoiced factually invoiced at the end of the year.

So from this perspective 6% to 7% on the full year is what we have for this year. And if you recall from the presentation we still plan to increase the share of so-called asset-based services.

So based on the centralized generation and so forth. So our long-term target is to grow the EBITDA margin to 10%.

But that is not for 2021.

And lignite spread, I think, they actually improved compared to what we've seen a few months ago. And I think we might have slide actually within -- slide 43.

So you can see actually that for 2022 the spread is much better than for 2023 to 2025 on average. And that's given by the expectation of lower commodity prices in the future very likely.

So that's the only thing we can do is our prices ahead and also hedge our exposure to carbon credit -- and what it is.

If I can have a follow-up question for this. So if the spread for 2022 are much better than for 2023, 2024 maybe a general question.

What will you do with the lignite plants if the spreads for the longer years will not improve whether you have some containment plan to close them?

Well, we are doing two things. One is we are, kind of, plant by plant adjusting our forward hedging strategy.

So when we don't see a margin on the full base load for the years, we will not lock this and we will wait to see how it turns out on the spot market. Obviously, this is an average price.

You see much more volatility in the prices also kind of different between winter and summer. So what we have as a plan we are working on our -- as measures we're working on is to be much more flexible both on the power plant side which is easier, but also bring some flexibility in our mining operation to be able to be online and function in the winter if I simplify it a little bit and be more able to basically reduce the availability and also the cost related to it in the summer.

So that's kind of the interim plan. Obviously when even this stops working we will eventually shut down the power plant, yes.

Thank you.

Okay. Thank you everyone for joining our call.

As always if you have some follow-up questions that come up later do not hesitate to contact Investor Relations. Thank you very much and have a nice summer.

Bye-bye.

Bye-bye.

Bye-bye.