CEZ as

F:CEZ

Earnings Call Analysis

CEZ Group Maintains Steady Financial Path in H1 2023

CEZ Group reported a 5% increase in EBITDA to CZK 62.4 billion in the first half of 2023, while net income fell 34% to CZK 22.3 billion due to windfall taxes. Despite these headwinds, the company is holding firm on its full-year EBITDA guidance of CZK 105-115 billion and adjusted net income of CZK 33-30 billion. Shareholders relished a record dividend of CZK 145 per share, paid out on August 1. Generation and trading activities encountered both positive price impact and regulatory costs, whereas mining benefited from higher commodity prices despite lower volumes.

CEZ Group's Financial Performance in First Half of 2023

CEZ Group, in the first half of 2023, saw a mixed financial performance. EBITDA grew modestly by 5% to CZK 62.4 billion compared to the previous year, while net income witnessed a significant drop of 34% to CZK 22.3 billion, influenced heavily by the introduction of windfall taxes. Despite these challenges, the company maintains its guidance for 2023 with an EBITDA forecast of CZK 105 billion to CZK 115 billion and an adjusted net income projection of CZK 33 billion to CZK 30 billion.

Dividend and Shareholder Value

A shareholder meeting concluded with the approval of a record high dividend of CZK 145 per share, which has been paid out, signaling confidence in the company's ability to generate shareholder value despite market challenges.

Operational Variances and Market Dynamics

Operational profits were affected by various factors, often counteracting each other. Power generation benefitted from higher average power prices with an expected range between €120 and €135 per megawatt hour, but this was largely offset by newly introduced levies on excess revenue amounting to CZK 11.1 billion. Trading activities produced a robust CZK 5.2 billion in spite of a drop from the previous year's volatility-induced highs. The mining segment exceeded expectations due to higher coal prices, whereas the distribution segment remained relatively flat.

Impacts of Depreciation, Amortization, and Taxes

The company faced higher depreciation and amortization charges, specifically on coal-fired assets. A noteworthy increase in income tax expenses to CZK 13.7 billion, largely attributable to the windfall tax, contributed to the reduction in net income.

Distribution and Sales Segments Insights

The distribution volumes decreased by 4%, attributed to customers reducing their consumption in response to high prices, which resulted in a 6% drop in EBITDA for that segment. In contrast, the B2B segment through CEZ ESCO saw a significant increase in its EBITDA by CZK 2.6 billion, driven by successful commodity sales and growth in energy services.

Outlook and Market Positioning

CEZ Group anticipates catching up on coal-fired plant production with expectations to be only 5% down by the year's end, and renewable generation is forecasted to remain 15% higher year-on-year, benefiting from better hydrological conditions. The company remains focused on reducing emissions, aligning with decarbonization targets.

Hedging Strategy and Market Observations

The firm's hedging strategy for carbon credits and electricity shows that they are well-positioned for the next few years. With prices stabilizing, the company has begun hedging positions once more, using new liquidity metrics to navigate the less volatile market. CEZ experienced no significant impact from decreased liquidity in futures markets and managed to maintain its hedging pace.

Q&A Highlights and Closing Remarks

During the conference's Q&A session, executives fielded questions ranging from EBITDA guidance concerns to market liquidity observations. The management remained firm on their estimates, emphasizing that their guidance accounts for uncertainties without being overly conservative. The executives also touched on potential company restructuring and investment strategies going forward. The call concluded without any further questions, marking the end of the presentation.

Earnings Call Transcript 2023-Q2

[Barbara Seidlova, Head of IR]

Hello, everyone, and welcome at CEZ Group's First Half 2023 Results Conference Call. It's my pleasure to welcome today's speakers, Martin Novak, Chief Financial Officer; and Ludek Horn, our Director of Trading.

I will now hand over to speakers to go through the presentation, and then there will be opportunity for you to ask questions. I'm now handing over to Martin.

[Martin Novak, CFO]

Thank you. Good afternoon, good morning. Let me start with financial highlights of last six months. You can see them actually on Slide 3 of our presentation. Our EBITDA has grown by 5% to CZK 62.4 billion. Our net income achieved reached CZK 22.3 billion which is 34% lower than last year. It's basically for due to windfall taxes as you can see actually -- as you will be able to see actually on later part of the presentation.

We are actually confirming our guidance for 2023 on EBITDA level, CZK 105 billion to CZK 115 billion and CZK 33 billion to CZK 30 billion on adjusted net income. Our shareholder meeting, important information, approved a record high dividend of CZK 145 per share. The dividend was paid on August 1. So most shareholders have the dividend actually in their bank accounts by now.

On the next slide, you can see actually waterfall chart showing variance between 2022 and 2023 comparable period of six months. The variances are not very significant. However, there are quite a few important factors that actually often offset each other. First column is actually generation facilities, our power generation.

And we were benefiting from rising average power price, our portfolio that is now expected to reach anything between €120 and €135 per megawatt hour depending on spot prices as we still have 7% of our power unsold. So the benefit for the first six months compared to previous year is actually CZK 13 billion.

On the other hand actually it is compensated by levies on excess revenue from generation activities in the Czech Republic, which reached CZK 11.1 billion. Trading activities - for trading activities actually reached CZK 5.2 billion which is about half of what it was last year. Last year, on the other hand, was full of volatility. As you all remember, so CZK 11.7 billion last year was actually very unusual, unexpected income.

Normal trading results under normal years was anywhere between CZK 1 billion and CZK 2 billion annually. So CZK 5.2 billion for first six months is still very significant income actually. We also have CZK 2.9 billion of trading - commercial trading and consolidation effects, mainly derivatives revaluation throughout the year that canceled actually towards the end of the year.

Mining segment, also better results than expected, mainly due to commodity prices, higher prices for coal as you will see later on, despite the decrease in our - significant decrease in mining volumes, there is a significant increase in EBITDA.

Distribution segment fairly flat, just CZK 0.5 billion below last year. And Sales segment, CZK 2.4 billion positive, half of it is actually attributable to one-off for our core decision against railway operator where we won actually 2011 court case for the electricity that they did not buy.

Although they were bound by the contract to buy and we had to sell it cheaper at a lower price because the price of the power in the meantime, deteriorated, and our actual loss on that was CZK 1.2 billion or -- not lost, but lower profit. So finally, the court has ruled in our favor and we received the cash. So this is how we get to CZK 62.4 billion or 5% higher than last year.

On the next slide, we can see actually changes in net income. Depreciation and amortization is somewhat higher due to faster depreciation on especially our coal-fired assets and some new assets as well. Then impairments, basically no impairments in 2023 and almost no impairments in 2022. We had some interest income from cash that was sitting on our bank accounts, because of the margining and so being credit for the dividend payment.

So being accumulated actually over that period of time, so significantly better interest income compared to the previous year. And then income tax is CZK 13.7 billion higher income tax, mainly due to CZK 13 billion, which is attributable to windfall tax that is actually accounted for in the first six months of 2023. And obviously, it was not in place in 2022. So net income is CZK 22.3 billion and adjusted net income CZK 22.5 billion.

Next slide, we just repeat what I've already said. We are holding our book EBITDA and also adjusted net income guidance on the same levels and you can see also some selected assumptions, which is level of power generation and our average achieved price to be between €120 and €135. We expect excess -- levy on excess revenues to be between CZK 8 billion to CZK 13 billion and windfall tax anywhere between CZK 22 billion and CZK 30 billion, again, depending how we sell remaining 7% of our unsold position in power.

Next slide, comparison of the dividend. We paid 100% actually of our 2022 earnings which reached CZK 145 per share paid on August 1, 2023. Now let's switch to generation mining activities. I won't go through it in detail, because we already covered some of it, and you can read it on the Slide #9.

So basically, overall Generation segment is fairly pretty much flat, just 1% below 2022 and it already includes actually levies as I said, otherwise, the result will be definitely better. And you can see actually increase in -- slight increase in emission generating facilities. So mainly because emission generating facilities benefit from higher prices, but they are not impacted really by the levies.

Because the power prices that we are selling power at today is actually -- or is below the levels set by the law, on the levies for the emission generating facilities, unlike nuclear, which is obviously traded and where we sell electricity above the -- reset by law. Trading activities that's what I already explained, so a little bit lower than in last year, but last year was really extraordinary.

Our Mining segment, we had a 14% decline in volume, 81% increase in EBITDA driven by higher coal prices. So clearly, that we are actually charging to our businesses, but also our external customers. Nuclear and renewable generation was -- nuclear was fairly flat, actually, just 1% up. For the full year, we expect 30 terawatt hours or 3% lower, mainly due to longer scheduled outages for both power plants.

On renewables, we were 15% higher year-on-year for first six months, and we expect to keep that trend actually for the full year, mainly due to better than average hydrological conditions in Q1 of 2023. Electricity generation from coal and natural gas. Coal was down 22%, natural gas 16% overall to 22% decline. We expect to catch up actually on coal-fired power plants in the Czech Republic and to be just 5% down. And the same in Poland it will be above 18%.

Mainly the market conditions during the second quarter were not supportive of running the coal plants as power prices were fairly low, carbon credits a little bit higher, but again, winter season is coming. So we expect to catch up during the second quarter of -- actually third and mainly fourth quarter of this year.

Our CO2, SO2 and NOX emissions are on Slide 13. We actually below our benchmarks and moving towards our decarbonization and desulfurization targets and also targets on reducing nitrogen oxide. So the thousands of tons actually are shown on Slide #13.

Emission allowance that is 6% is open position on emission allowances that we still did not buy for 2023, 7% which means basically the same number is actually open position on power. You can see assumptions on the slide actually of how - about our expectation on how we sell the remaining volume towards the end of the year.

Next slide, important slide, Slide 15, actually shows our hedging position, both on carbon credits and also on electricity sold, both in showing average electricity price, which is for following two years around €128, €127. We are 66% hedged for 2024. 41% for 2025 and 14% for '26. After reducing our hedging volumes last year due to margining issues we actually are back, and we have started to hedge our position again, of course, introducing many new metrics on liquidity.

Now the volatility is much lower than it was in the past. Power prices have gone down and gas prices as well. It looks like there will be no gas this winter. So there's no reason for -- there is no expectation that there should be anything similar to what we lived through 2021 and beginning of '22 - spring '22 timing. That's all for generation mining.

And now I will hand over to Ludek Horn, and he will guide you through distribution and sales slides.

[Ludek Horn, Director of Trading]

Good afternoon, good morning, everybody. First slide is related to our distribution business. You can see in the first half of the year, distributed volumes decreased by 4%, the main reason is that our customers decreased their consumption because of high prices, and it resulted in the decrease of EBITDA by 6%.

On next slide, you can see figures related to sales to end consumers itself. On Retail segment, it means that the daughter company CEZ Prodej the decrease of EBITDA is CZK 0.1 billion. Actually, the commodities sales was even lower, minus CZK 1.5 billion, but it was almost compensated by revenue from court case with railway company, and we received CZK 1.2 billion back.

The B2B segment, our daughter company, CEZ ESCO, we can see the increase compared to the last year CZK 2.6 billion. As commodity sales was successful. They managed to increase EBITDA by CZK 1.3 billion and also, they have increased in their energy services activities, both in Czech Republic, Slovakia and Germany.

On next slide, you can see volumes of electricity and natural gas sold. In retail, you can see a decrease by 4% on a year-on-year basis. We expect that on the whole year, the decrease will not be that high.

So that's probably almost everything on the last slide, you can see revenues from sale of energy services means our CEZ ESCO group companies in Germany, Elevion Group increased their sales by 15%. In Czech Republic, Slovakia by 61% and in other countries like Poland, Romania, Austria by 16%. So average increase of revenues is so far 29%. On a calendar year level, we expect that the increase will be 23%.

That's all from my side.

[Barbara Seidlova, Head of IR]

This concludes the presentation, and now we are ready for the questions.

[Barbara Seidlova, Head of IR]

[Operator Instructions] The first question is from Wanda Serwinowska.

[Wanda Serwinowska, Credit Suisse]

Hi good afternoon. Hopefully, you can hear me. Wanda Serwinowska from Credit Suisse. Three questions from me, if I may. The first one is on your 2023 EBITDA guidance. When I look at the midpoint of your segmental EBITDA and I compare it to the guidance that you disclosed back in May, basically, there's like CZK 5 billion upgrade if you take -- if you sum up the midpoints. But at the same time, you decided to keep the group level EBITDA guidance unchanged. So the question is why? The second point is on the some press speculation on the windfall profit tax that might be shortened and it was from you, a comment on that one would be appreciated. And the third one is on the GasNet acquisition. I mean the potential acquisitions CEZ publicly stated that is looking into this. So my question would be why are you interested? Is it just because it's a regulated asset in the Czech Republic? And would you see any synergies because of your electricity networks? Thanks a lot.

[Martin Novak, CFO]

So thank you for the questions. 2023 EBITDA actually guidance, there are still plenty of unknowns. It's important to say that our EBITDA is not -- is a seasonal EBITDA. So third quarter is usually the weakest and first and fourth quarter are the best, fourth quarter sometimes impacted by impairments. So basically -- and we still have some percent of power unsold. So depending on spot prices, market prices it can impact EBITDA fairly significantly.

That's why we actually decided to keep range unchanged, same with net income. Windfall taxes, as you all know, actually levies are just 2023 issue, windfall tax was approved for 2023, '24, '25. And there has been a lot of rumors. However, we did not notice any activity on the parliament side or anybody's side actually changing the law because you can only do that through changing the law, and there is no activity going on in terms of that situation.

There were some discussions about maybe that actually the gaps on power prices for retail customers should be lifted earlier than by the end of the year. But again, no parliamentary activity is carried out these days. So I would assume for planning purposes that things stay as they are. And if there is any windfall tax discussion, it will definitely happen after August, sometime September, October, if at all.

Other things like levy and so on, probably not likely before because we have only 4 months to go actually of those measures anyway. GasNet, yes, we are interested. It's a regulated asset actually in our portfolio, we actually know how to operate distribution assets. So we know how to work with the regulators. It is on our backyard here. We understand it very well it's a regulated asset. So relatively safe investment. Gas will be here with us for a few more decades for sure.

So as something that will be replacing sooner or later, for example, the lignite plants, but of course, also consumed by the companies and households, so that's one of the main reasons. And of course, you can have certain synergies between power group and gas group of the company in terms of distribution.

Of course, in terms of sales business, not really because we are living in an unbundled world, so anybody can access your both electricity, but also gas distribution. There is no process as far as I know, just a discussion, but nothing official out yet.

[Wanda Serwinowska, Credit Suisse]

Can I have a very, very quick follow-up. So basically, on the 2020 EBITDA, is it fair to say that you guys you incorporate some buffer given the risk for Q4 and -- under normal circumstances, the guidance would be raised at the group level. Is it a fair statement?

[Martin Novak, CFO]

I don't think so. I don't think so. I think it's just a fair estimate. It's not that we will be overly conservative. So I think...

[Wanda Serwinowska, Credit Suisse]

But if you raised the divisional guidance by CZK 5 billion, and you don't move basically the group level, it's just inconsistent a bit in my view?

[Martin Novak, CFO]

I think we are now -- our guidance is in the middle of our kind of -- I mean CZK 105 billion to CZK 115 billion is probably fair on both sides. So that's the only thing we can say.

[Wanda Serwinowska, Credit Suisse]

Okay. Okay. Fair enough. Thanks a lot.

[Barbara Seidlova, Head of IR]

Okay. The next question comes from Polish telephone numbers starting 71. You can ask your question.

[Piotr Dzieciolowski, Citi]

It's Piotr Dzieciolowski from Citi. Can you hear me?

[Barbara Seidlova, Head of IR]

Yes, quite clear.

[Piotr Dzieciolowski, Citi]

Oh, yes, apologies. I dial in with the phone. So I wanted to ask you a couple of questions. Firstly, on the - what are the next steps in the process and the investments? And when essentially you need to start spending some CapEx on the asset realistically because that potentially could interfere with this restructuring program that you are planning? And second thing on - do you think this transaction - do you know any timing around this transaction and how that could interfere with this restructuring process as well. You were talking - the market was talking about possible company breakup. So if you were to acquire this asset before that could potentially have implication. Can you link the two things together? Or these are totally separate element. So these two questions to start with, please.

[Martin Novak, CFO]

Actually, I didn't catch the first question. It was about investments into CapEx, but it was related, I didn't catch. We didn't hear...

[Piotr Dzieciolowski, Citi]

So I wanted to ask you about the nuclear investments. What are the next big milestones in the process in the investment when you have to start spending CapEx?

[Martin Novak, CFO]

We actually are not going to spend any CapEx. It will be all paid for by state. This is an agreement. Actually we only financed the proprietary work, which will, after selecting the winner, which should be towards the end of this year. And after being approved by the government because they are actually financing partly. Then only then actually the planning phase will start.

And I think our total exposure was something like CZK 1 billion, so we're following a few years actually of planning it. So not really immaterial CapEx, we paid for no construction. So all construction is going to be paid for by the government with a 0% interest loan. And only after the plant is up and running and we received contract for difference, basically, we will start or the entity will start repaying it.

Whoever it belongs to, it may be our, we also may actually use an option and put it on state or state can use a co-option. So we are very part from any CapEx out for nuclear. Breakup of the company, I know there are many talks and we already talked about it a few times that it might actually make sense to split the power generation assets, nuclear, coal, renewables and also actually or separate it on balance sheet, for example, level from sales, distribution assets.

So far, we are not working physically on day-to-day basis on any project like this. Originally, the main reason was actually to be able to obtain cheaper financing for the non-coal part of the business. However, if this happens, it's fairly simple. It's just shuffling with shares because all companies like sales and distribution are 100% owned by CEZ. So you will only be actually moving shares between entities. Same with GasNet.

If it ever happens, we would be acquiring shares that can be actually folded on to either a parent company or a subsidiary of CEZ that will be specialized on customer segment, but nothing has been approved yet. And now no detailed work is being done. Regarding the transformation on the shareholder level, which has been also discussed many times, actually, during last call, there is no action from the government, clearly, and I wouldn't expect anything over summer, but that's only my point of view.

[Piotr Dzieciolowski, Citi]

Okay. Thank you very much.

[Barbara Seidlova, Head of IR]

The next question came through chat. So [Michal Kozak] is asking what is the reason for the decrease in EBITDA from emission generating facilities from CZK 11 billion in Q1 2023 to CZK 0.7 billion in second quarter 2023?

[Martin Novak, CFO]

Yes. So it is a seasonal effect. Basically, as the power prices are normally lower, especially power prices on unsold parts of the power generation and also demand for heat, which we generate as often main product of our power plant is actually much smaller during second quarter rather than first quarter. So just a seasonal thing. So next question.

[Wanda Serwinowska, Credit Suisse]

Hi. Can you hear me? Can I ask my follow-up question, would it be okay?

[Martin Novak, CFO]

Yes.

[Barbara Seidlova, Head of IR]

Yes.

[Wanda Serwinowska, Credit Suisse]

Okay. I was looking - I mean - would you be able to comment on the liquidity in the market? Because that's something that all the European utilities having complain that basically the liquidity in the forward curve, in the forward market, it's pretty tiny. So you can't really take an advantage of the prices that you can see on the screen. Because when I look at your 2024 volumes, you are slightly below the historical levels, but the gap has been basically closing versus the level seen in Q1 or Q4 last year for the 2024 volume. So any comment around the liquidity in the market would be appreciated?

[Martin Novak, CFO]

Yes, definitely, we can observe certain decrease of liquidity, but the effect on us is not significant because we sell pretty high share of our production through our sales companies, so we don't need to sell on the market. So we managed to keep the speed of hedging without any, let's say, negative effects.

[Wanda Serwinowska, Credit Suisse]

Thanks. And any observations from - on the forward market. I mean if you go to the exchange, any observations there that you can see?

[Martin Novak, CFO]

I think, of course, after crisis, which was caused by war and resulting margining or liquidity crisis, we can see that the pattern of trading slightly changed. But anyway, we can sell what we need. No problem for us with it.

[Wanda Serwinowska, Credit Suisse]

Okay. Thanks a lot.

[Barbara Seidlova, Head of IR]

Okay. I see there is no more people waiting with their hand raised. So, I think that concludes the conference call for today. If some further questions come up, just contact Investor Relations at CEZ. Thank you very much, and have a nice rest of the day.

[Martin Novak, CFO]

Good bye.

[Ludek Horn, Director of Trading]

Bye.