CEZ, a. s. (OTCPK:CEZYY) Q2 2022 Earnings Conference Call August 9, 2022 10:00 AM ET
Company Participants
Barbara Seidlova – Head, IR
Martin Novak – Chief Financial Officer
Pavel Cyrani – Chief Sales and Strategy Officer
Conference Call Participants
Wanda Serwinowska – Credit Suisse
Jan Raška – Fio Banka
Operator
Dear ladies and gentlemen, welcome to the conference call of CEZ. At our customers’ request, this conference will be recorded. [Operator Instructions]
May I now hand you over to Barbara, Head of Investor Relations, who will lead you through this conference. Please go ahead.
Barbara Seidlova
Hello, everyone, also from me, and welcome on our record quarterly results call of CEZ Group. Let me introduce today’s speakers. It is Martin Novak, Chief Financial Officer; and Pavel Cyrani, Chief Sales and Strategy Officer.
I’m now handing over to Martin to start with the presentation.
Martin Novak
Good afternoon, good morning, everybody. So let’s start on Page 3, where we have our highlights financial results for first half of 2022.
Our operating revenue has increased by 21%, up to CZK 130.5 billion. More important, EBITDA increased by 88% to CZK 59.3 billion. Net income reached CZK 33.6 billion, which is basically CZK 32 billion more than during the last year, but we also had actually some adjustments last year impairments on coal assets on the coal mines. So compared to adjusted net income, we are almost 200% higher than last year.
We also decided to increase our EBITDA guidance to CZK 100 billion — to a range of CZK 110 billion to CZK 115 billion versus old guidance, CZK 95 billion through CZK 99 billion. And our adjusted net income is also rising significantly to CZK 60 billion to CZK 65 billion.
Another important highlight, our shareholder meeting approved a dividend of CZK 48 per share at our Annual General Meeting. And actually the dividend will be paid on November 1, 2022.
Main — on the next slide, you can see actually main changes on the year-on-year numbers. Clearly the largest change or largest variance is in generation, CZK 30.4 billion out of CZK 30 billion variance. So more than our variance is actually rate generation. There are a few important factors. The key important factor are extremely high power prices. So CZK 21.5 billion is actually coming from high prices.
We also had a record, I think our record high ever result of trading of CZK 7.1 billion within the first six months of 2022. Before such a volatility in the past years, we used to have anything between CZK 1 billion to CZK 2 billion annually, now CZK 7.1 billion for first six months.
And also some specific temporary effects of hedging contracts basically and time swaps of emission allowances, CZK 3.7 billion. The negative variance actually is related to sales, where we had — where we have CZK 3.2 billion lower result than in the previous period of 2021. And I will show you later on explaining what happened with solar power.
Then on next slide, you can see the details of what I just described on the previous slide. So we can now skip that slide and go to Slide #6. Here, again, we are showing a change in our estimate of today for 2022 numbers versus our May 10 estimate that we published 3 months ago. So significant growth both in EBITDA and also net income.
Three main reasons are even higher power prices, especially those on the spot market because we — at the beginning of the year, we had about 10% of our electricity positions to open. Now it is actually 5%, as you will see later on, but it will generate another 19% of sales this year and also spot prices are extremely high, and we are benefiting heavily in 2022.
We also have higher income from trading activities, as I said, and also high availability of nuclear power plant that had a 3% higher power generation compared to 2021. Of course, those factors also have an impact on adjusted net income. We also have some risks and opportunities. Of course, there is always a risk of power prices going down, which doesn’t seem to be very probable these days. Of course always availability of generation facilities, further gains on trading activities and potential introduction of extraordinary tax in Czech Republic.
We don’t have any more information about that. There is a political discussion only. There is nothing — no proposal, for example, or anything like that. So still just a political discussion, and that’s why we don’t put any estimates of how much it could be because we have no information.
Dividend from 2022 earnings. If we stick to our 60 — to our range, to the upper part of the range, meaning 80% of our adjusted net income, the total dividend would be somewhere between CZK 48 billion to CZK 52 billion. So almost CZK 100 per share or almost basically or doubling the dividend for last year.
We also, on the next slide, actually show or react on geopolitical developments in Europe. And within EU, we have 3 strategic initiatives. We would like to deliver affordable energy, be independent from Russia and be emission free. Nothing changes on our decarbonization plan, so we still stick to what we announced earlier. And basically are helping also to secure gas from other sources other than Russia, as you will see like in the latter part of the presentation.
On another slide, actually, we have started measures to ensure energy independence and meeting our vision 2030. I will only read headlines. The details are actually included. Emission-free nuclear industry, we are preparing new facilities, tendering new units. Of course, with state support, we also selected new nuclear suppliers for nuclear fuel in Temelin, which are companies Westinghouse and Framatome. So switching from Russians to U.S. and French suppliers.
Renewables, we won actually an auction for support — CapEx support for 170 megawatts of installed capacity, and we are on a path to reach 1,500 megawatts by 2025. Now actually the second round of the bidding is open, and we will — we are again bidding with our further projects.
Decarbonization commitments, no change. We also have enough gas inventory for our customers, both retail and large customers. And we also purchased a strategic storage for a Czech State and as you will see further on, we actually also participated in one auction in Netherlands for LNG terminal, where we secured the amount of — equivalent 1/3 of Czech gas consumption. We also secured transportation lines between Netherlands and Czech Republic. So we have the capacity. And depending on the need of the gas and prices of the gas, we will be able to use this facility.
And we also manage our liquidity and credit risks, especially related to relatively significant margining due to significant increase in power prices. I will comment on it later. We have a special slide on that.
Selected events in the past quarter, generation already basically commented on all of them. So there’s just more detail.
On Slide 10, there is information about LNG terminals. So as I said, 1/3 of Czech annual gas consumption contract is concluded for five years. The capacity will be commercially managed by CEZ. But together with Czech government, we actually have a deal with Czech government that includes option for capacity signed and mainly, especially cost sharing with the government. That’s probably the terminal will start operating in September, so next month actually. And should there be any need, we can start buying LNG straightaway.
Important Slide 11, on liquidity. Our liquidity on the 30 of June is actually on the right side, on the table. Our total liquidity was CZK 92 billion. During July, we have drawn another CZK 50 billion or EUR 2 billion from Czech State as part of their liquidity support scheme. And also we have EUR 1 billion or CZK 25 billion, which is the last line actually of the last — the one before last called contracted with Czechia and standby facility that can be drawn within five days. So total liquidity as of August 2 is under CZK 133 billion, we never had such liquidity in the past.
On the right hand, margins actually have reached CZK 89 billion. So there was an increase between June when it was only CZK 63 billion. So our liquidity position is very robust, very strong. And as the riskiest year 2022 will be going to an end because the margin requirements are the highest for 2022. And of course, with average achieved price for 2023, 2024 and 2025 being much higher, the margin requirements are lower than in 2022. So the risk will be much lower as well.
And then Slide #12 actually shows our ESG area and structure of CEZ activities according to EU Taxonomy. So you can see the chart of our activities, science-based target initiative validated our climate targets for 2030. They are fully in line with well below 2 degrees scenario. We also decided and declared moving our carbon neutrality by 10 years from 2030 to 2040, so we would like to be carbon neutral by 2040.
We published our sustainability report in line with the new EU Taxonomy and other standards that are listed here. We launched special ESG website for those of you who like to go through it and many other initiatives. Important following the upgrade of our ESG rating by MSCI to AA from BBB. We are now among the top 33% of energy companies. So we are getting close to our target to move to top 20%.
Our share performance comparison to our peer group, both for 2021 and also in 2022. So despite what’s happening on the market, we are still the best share for last 1.5 years with power prices of course, where they are where they will be in the future now when we sell actually forward, the outlook seems to be very bright.
Market cap has increased by 1,540% compared to three years ago. Now as our company three years old now and stock performance actually was plus 75% last year and but 29% this year.
On May 6, we celebrated 30 years of CEZ. So again, some important numbers for you, if you want to go through it. What I will stress out the part on financials that you can actually see for yourself. The emission reductions. We are now compared to 30 years ago at half of CO2 emissions, 11% of carbon of NOx emissions and only 1% of sulfur emissions. So we reduced our sulfur emissions by 99%, which is extremely efficient, 8,000 tonnes of SO2 versus 769 tonnes 30 years ago. So big achievement in that area.
We also show on next slide how much we paid actually in taxes, dividends, donations, carbon allowances. So this is more for the state stakeholders. And now we will move to generation mining.
On Slide 17, you can see clear EBITDA power segment, Generation & Mining, which I basically covered than at the beginning. So you can see also much more details on the year-on-year effects in first half of the year and also second quarter mainly about power prices. It’s mainly about trading success of CZK 7.4 billion, and specific effects, which is mainly timing during the year, actually, between the quarters. Mining CZK 1 billion better due to higher deliveries to both CEZ Group and also to external customers.
On Slide #19, you can see generation from renewables and nuclear sources. As I already mentioned, 3% higher generation from nuclear. We had a decline in Hydro in the Czech Republic of 22%. But on the other hand, better than the conditions in Germany by 20% compared to last year, but Hydro is significantly larger, of course, than wind in Germany. So overall a decline of 16%. We expect renewables to be down by 10% because we will not catch up for less snow this winter in the Czech Republic, and we expect basically even a result on our nuclear facilities.
On coal and natural gas generation, there is a slight increase in coal generation due to shorter outages at 2 of our plants. But we also sold actually a year ago on 17th of August, we shut down actually terminated the plant in Melnik. So the impact of not making power will be seen further and we have longer outages in our EBITDA for new bond actually.
We had a significantly lower generation from natural gas due to market conditions. It wasn’t towards running the plant as much as it was in 2021. And it’s important to note that actually, for 2022 full year, we are showing 1.3 terawatt hours to be produced by CCGT, which is basically what was produced for the first seven months of the year as it is very hard to predict that the market conditions will be suitable for running CCGT and that there we will be allowed to run it if there is any shortage of gas in Europe.
This would be probably the first plan to shut down because how to save gas because Czech Republic really doesn’t need this plant for making power for power per generation. So it’s kind of nice to have, I would say, opportunistic plant. It always has been. So we might generate something, but we don’t plan for instance, we don’t show it in our guidance in any longer.
Next slide, actually, emissions. We are doing very well compared to — on the chart. So basically, you can see CO2 emissions intensity. You can also see sulfur dioxide and nitrogen oxide reductions year-on-year within 2020 and 2022.
Important slide, Slide 22. Here you can see that actually our open position on power actually generated to be sold is only 5%. But on the revenue side, for 2022, which will be 19% because we basically sell those remaining 5% at peak prices, around EUR 400 to EUR 500 easily, which, of course, adds to our average achieved price significantly. So our achieved price now has moved to EUR 103 to EUR 107 per megawatt hour on average. We also have 7% open position on our carbon credit.
Hedging, we continue hedging our power straightforward, basically three years ahead. So here you can see on the slide, both hedging of electricity and also carbon emissions, carbon allowances with average achieved prices in the bubbles. Of course, those prices now are, I would say, growing very fast due to, for example, selling 2023 power at the levels of above EUR 400. So an average of EUR 90.5, will be moving fast upwards. And you can also see proportion of our hedges, so 70% for 2023, 36% 2024, 13% 2025.
So that’s all for power generation sales. And now I will hand over to Pavel Cyrani to share with you some news on distribution and sale segment.
Pavel Cyrani
Okay. Thank you, Martin. Hello, everyone. A quick overview of the distribution sales segment. On the distribution side, I’m on Page 25. You see the EBITDA being stable year-on-year in the first half of this year.
We see a drop in consumption, now I will comment this more on Page 26. Now this is consumption and not that we would be supplying, but overall on our distribution area, which can serve as a proxy also to the whole country. On Page 26, what we see is, we see almost a development in the large customer and retail customer business segment, still limited impact of the higher electricity prices on the production, where we see a significant drop is in the residential customers, but this one should not worry us because it’s driven by two things, mainly by a milder winter this year compared to 2021. So something that kind of fluctuates with weather.
There is also some impact driven by the fact that consumption of ’21 among residential customers was higher than usual because a lot of people — many people were home, working from home. So the residential consumption increase in ’21 and now normalized in this sense. You also see that the overall consumption decrease is significantly lower if you compare — if we do it a temperature and calendar adjustment, which is still very tight.
Now on the sales segment, that’s a segment that was hit by the high electricity prices naturally. Again let me repeat that all the supply companies of CEZ Group are buying power at arm length from the generation side of CEZ Group, so normal standard market prices.
On the retail segment represented by CEZ Prodej, we see a drop of CZK 2.2 billion, mainly driven by basically two things. One is as the oil prices and gas prices increased very quickly, the reaction time for changing the tariffs is slower, but normal times, having one, two or three months reaction time depending on what the tariff it is, was always okay. Now with electricity prices and gas prices changing by tens of euros in days and hundreds of euros in a month, this reaction times creates volatility in that risk in the specific year of 2022 factors in negatively.
Secondly, also all the kind of deviation to market purchases depending as the consumption varies day-to-day are significantly more expensive than we have been used to. So also this part of the cost needs to be factored in, in the tariffs and again, duration times is slower than we develop a little that we are observing in the market. But this should obviously normalize over time over the — in 2023 to some degree and even more so ’24 and ’25.
A similar situation is in the B2B segment because when you look at the energy services, they are pretty much stable where you see the biggest drop is the commodity sales in CEZ supply commodity to B2B segment in Czech Republic and it’s a similar story as in the retail segment.
Now in terms of volumes, you see that on 2028 that the volumes that our group is supplying has increased and that is even after taking into account that they should normally decrease driven — given the milder winter. This is all driven by the influence of customers that we have received at a number of other suppliers from bankrupt at the end of last year.
Now again, this created some extra cost in terms of serving these customers, but I consider good investment in this customer base to be a good source of margin and profits going forward as we catch up with the tariff with the current situation in the wholesale market.
On Page 29, you see the revenues from Energy Services. They are increasing significantly. There is obviously a very increased demand for all kinds of services that help the customers to cope with high electricity prices and also trying for the customers to reduce their dependency on gas. So naturally switching to electricity, we see a 30% growth. You may ask why this has not factored in the EBITDA. There are two things to it. Number one, the EBITDA always catches up more towards the end of the year. Secondly, we also, at this very moment, see a decreased availability of kind of supply and supply chains.
So we are also coping with the increased costs of these solutions, starting with PV panels and any other technology you can make. So again, we hope that this will be a good base. All these relationships on our B2B customers more for the years to come this year, the impact on our processes that we keep them stable.
And I think this is it. And Martin, back to you. Bar?
Barbara Seidlova
Operator, we are now ready for questions.
Question-and-Answer Session
Operator
[Operator Instructions] And we received the first question from [indiscernible]. You can ask your question, maybe you are on mute, from Erste Group. Okay. We will move on to the next question. It is from Wanda Serwinowska, Credit Suisse.
Wanda Serwinowska
Wanda Serwinowska, from Credit Suisse. Two questions from me. The first one is on the risk of the political — adverse political intervention. I noted your comment that you don’t really know what would happen, but if you could walk us through the options that are on the table, that would really help us to understand the potential impact. And the second comment would be on the supply business. Have you seen any increase in the bad debt so far?
Martin Novak
Okay. So risk of tax, the political basis as in many other European countries about excessive profit tax that would actually be used to compensate for higher power prices for households and companies both for energy companies and also banks are being discussed. But the discussion is definitely not over because current government is right wings government. So this is something you would not really expect.
On the other hand, the energy prices are really significant and the electricity and gas bills are growing faster. So this is one of the options. Well, we don’t have any other information. I think technically, what would happen, there would be something like a higher corporate income tax rate that is today, 19%. So it could be more than that, but by how much, we don’t have any idea.
So as soon as we know more, for example, when there is some tax bill proposal, if at all, not necessarily certain that it would happen, then we would calculate the potential impact for the future years. It’s also not clear whether — what we hear actually from politicians from the media, it should probably be applied on 2023 year, meaning payable in 2024. — which, on the other hand, doesn’t help much very much consumers. So plenty of information that is not 100% credible. So that’s the only thing we can say basically.
And the supply business, we don’t see any bad debt increase. We well our customers on the retail side, for example, and they have high bills to settle compared to advances, we are able to provide them some payment schedules, but we don’t see any significant or even insignificant impact yet. So we’ll see what will come when fixed contracts and fixed tariffs will be over for a big part of the consumers. But so far, we don’t see any significant increase in bad debt at all.
Pavel Cyrani
Yes. And Martin, to complement you, also there should be — the government is preparing a what they call an efficiency tariff, basically lent subsidy for all the customers towards their electricity and gas bills to start 1st of October. And also starting from then to reduce the contribution to renewables from tariffs, the payments towards renewables from the payers. So again, it should help the customers to cope with the increase in prices once their fixed tariffs expire. So that should also help. But otherwise, as Martin had no impact yet.
Wanda Serwinowska
Can I just ask one quick follow-up. I mean, on the windfall profit taxes or extra taxes in general, is it possible that it will be applied to 2022 earnings as well? Or I’m just thinking, is it only 2022 or ’23 and ’24? I mean is there any clarity there? Or it’s still hard to say?
Martin Novak
There is — so there is no clarity. But what we understood from media, it would be valid of January 1, 2023, meaning it would apply for ’23, but we really don’t know, it’s all speculation. There is no official communication on that topic. Now there is a really political discussion going on, plus there is August, and the discussion is not very intensive, of course, due to holidays.
Wanda Serwinowska
And when should we expect the clarity? Is there any time line when we should get the announcement from the government?
Martin Novak
I think we should know something in September, October, Pavel, you may have more information on that, but that’s probably what it is, if it all.
Pavel Cyrani
As to the parliament and together with the government, they will come from the holidays in September. So that’s when I would expect the discussion to restart or continue.
Martin Novak
Yes, and they will need to basically put together some kind of law proposal first. So there is, I would say, a long way.
Operator
The next question is from Jan Raška, Fio Banka.
Jan Raška
Two questions. The first on the earlier carbon neutrality target. When you presented the 2050 target, we got a shutdown plan for the lignite units. Do you plan to publish anything like that also now for the earlier target? And could you provide us maybe with that? That’s the first one.
And also, is there an update to your CapEx plans also with having in mind the increased cost for your contract partners, how do they react to the increasing prices? Are they renegotiating the contracts or are they trying to add commodity inflation, closes? What’s going on, on the CapEx side?
Martin Novak
Relative to — go ahead, Pavel.
Pavel Cyrani
Now in terms of our nation shutdowns, we are not changing the plan at this moment because it fits in the 2040 carbon neutrality as well, where the change comes from is the stricter targets is from some green investment because beyond 2014, the only carbon, we could emit before would come from natural gas now with a significantly stricter or more adverts targets on the green gases. We plan to supply our gas stations with green gases.
Now in terms of the CapEx plan, I think it’s a good question. But on this one, the jury is still out. We are expecting what will happen, let’s say, one or two years down the road. We only start with a significant CapEx investment in generation or more significant as I say, two, three years from now with the stations in Melnik coming online ’27 on the first one and the second around 2030. And we’ll see how the supply chains will kind of react.
We obviously see a significant shortage right now, but I would hope that this is not something that would last for many years, but it would be over at the supply chain catch up with the changes in the demand. Martin?
Martin Novak
Yes, that’s what I think. I think you answered it all.
Operator
We have no further questions. [Operator Instructions].
Martin Novak
Hello. Okay. So thank you very much for participating in our Q&A and our conference call. And if you have any other questions or follow-up questions, please do not hesitate to contact Investor Relations, me or Barbara Seidlova. Thank you very much.
Operator
Ladies and gentlemen, thank you for your attendance. This conference has been concluded. You may disconnect.
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