Cez As S/Gdr 144A

and welcome to chess group conference call on first quarter 2024 results. Martin Novak, chief financial officer will go through the presentation and then we will have a room to your questions for which we also have Mr. Ludwig Horn, head of trading available for the answers. Now I'm handing over to Martin to go through the presentation.

Thank you. Good afternoon. Good morning, everybody. So let's start with a brief presentation. On the first table, you can actually see our financial highlights and full year outlook. Our EBITDA has grown by 24% to 40.3 billion check rounds. Our net income and at the same time adjusted net income has reached 13.6 billion check rounds or 25% improvement year on year. We confirm our guidance of 115 to 120 billion for 2024 and on EBITDA and adjusted net income at a level of 25 to 30 billion check rounds. So there is no change compared to our last presentation that was held on March 21st. On the next slide, you can actually see main variances between Q1 2023 and Q1 2024. As I already said, our EBITDA has grown by 24%. And you can see the main factors actually on slide number four, where the biggest variances are basically two. The first one is in the generation segment. last year in first quarter we had an additional cost of 10 billion Czech crowns related to price caps on various power plants as it was introduced by the government and actually four year cost at the same time was as well 10 billion Czech crowns so basically all those caps or payments above those caps have materialized in the first quarter. Clearly, this is not valid any longer after December 23 and that's why we don't have this extraordinary cost and therefore we have 10 billion lower cost, meaning 10 billion better result in Q1 2024. At the same time, we also see narrower margins, mainly on the lignite plants. So about 5 billion Czech crowns. So this is partially compensating a lack of those price caps. In the sales segment, we had a negative result of 3 billion Czech crowns in our retail business last year. Now we are kind of back to normal. So 800 million positive result, which makes total difference with other little items of 4.2 billion positive. So those are two main variances actually in EBITDA. Going to net income, main changes actually in net income are mainly in interest income and expenses where we have a little bit higher interest expense or the other way revenue on interest received due to declining interest rates. We have somewhat higher nuclear provisions and there is also segment other income and expenses and there is a revaluation of financial derivatives of 2.2 billion check rounds negative, which actually are function of weakening check round. So in total, we are going down to 13.6, which is 2.7 billion better than last year for 25% growth. Next slide, you can see total operating results in volumetric units, which we can probably skip and go to slide number seven, where we are actually confirming our guidance from March, 115 to 120 billion on EBITDA and 25 to 30 billion net income. The main year-over-year effects on EBITDA are expected lower trading results. Last year, we had actually second-best trading result in our history. The first The best result was actually in 2022 due to high volatility of prices. We don't expect such a volatility and therefore we expect lower trading result. We have also lower sales for ancillary services. We have a higher cost due to inflation. And on the other hand, as a positive, we have still power prices that are a bit higher than the entire effect of power hedging in previous years. And we don't pay 10 billion Czech crowns in caps on power prices. There are also selected assumptions listed and opportunities and risks. So clearly opportunity is a better trading result than anticipated. And negative downside is always availability of generation facilities, mainly nuclear. On the next slide, you can actually see new nuclear events. In Dukovan, we actually received updated bids for the construction of new nuclear power plants from two bidders, which is French EDF and Korean KHNP. It was submitted on 30th of April. And now we are actually analyzing the bids. We will hand it over to the government who will based on our recommendation, make a choice of the winner and the final contract should be signed by March 31, 2025. There is no change in the schedule, so the unit should start operating in 2036. EU has also approved state aid for our nuclear unit in Dukovane. with the parameters listed. So basically, government provides interest-free financing that should be actually repaid within a few decades. We will receive CFD basically for 40 years. And of course, we will be protected against changes in the legislation and regulatory environment in the Czech Republic. So now let's go to the segment of generation mining. On slide 10, you have a lot of detail on this segment. I have covered the most important factors, which is basically no levy on the nuclear plants or on our production portfolio. mainly it is actually seen in nuclear you can see that on the second line item actually nuclear has improved its operations from 10.7 to 19.9 and the main reason is that nuclear was mainly subject to price caps as the price cap on the nuclear units was around 70 euros versus coal units were around 180 euros so that's the main variance You can also see emission generating facilities, as I said, are impacted by higher carbon credits. So 11 billion in 2023 and 5.9 billion EBITDA in 2024 declined 47%. More details actually in the text. Then when we look at next slide, slide 11, you can see our nuclear and renewable generation. So emission free generation. We had a slight decline actually in the nuclear facilities, but this is different on scheduling our planned outages. Overall, year-on-year, the plan is to be 1% below last year, again, because of the outages. For renewables, we plan to be about 4% higher due to better than average hydrological conditions. in the Czech Republic, and we also have new installed capacity in Germany. On the next slide, we can see actually electricity generation from coal and natural gas. There is a quarterly decline of 2% in total, 15% on gas, mainly due to market conditions, meaning gas price, electricity price, and carbon grade price. 38% decline in Poland, the same effect. and 5% increase actually in the Czech Republic mainly due to shorter outages in two of our power plants. Year on year we plan decline actually in the Czech Republic of 8% on coal, 8% in Poland and 9% increase in gas. So in total we plan 6% decline actually in our electricity generation that is coal and natural gas based. uh risk price risk hedging we are basically almost fully sold for this year only three percent open position for this year and uh zero percent basically sold position open position and carbon credits uh on next slide you can see uh the level of hedges for 2025 through 2028 and the same on carbon credit side So looking at the prices, we can clearly see that we are above current levels of market prices, forward prices actually, for 2035 through 2028 due to our hedges in the past. The same applies to carbon credits that are somewhat more expensive, but at the same time, we were selling electricity at much higher prices. So always kind of looking at our margin when we sell coal-based electricity. Distribution and sales segment is actually on the next slide. So on slide number 16, you can see our EBITDA distribution, which is 10% higher, mainly due to higher margin from distribution fees growth. There was a relatively significant growth in the fees. We have lower revenues from connection activities and providing balancing of the grid. and connecting new customers with less demand. And we have also somewhat higher expenses due to wage inflation. So electricity distribution is 1% lower after we actually climate and calendar adjusted, it is 1% higher quarter on quarter. Sales. segment EBITDA. I already commented on retail segment. We had a negative in 2023 because sales retail customers are paying the same price per megawatt hour no matter whether it's January or July. We actually entered the year with somewhat open position. So in the first quarter, our sales organization had to pay more for the power. uh and it made the money back actually uh in the few in the uh out course uh but compared first quarter uh to first quarter 2023 24 when power prices were much more stable we are actually have a significant difference of 4.2 billion positive uh where chess pro day which is our retail organization is returning back to standard operations i would say not seeing such a swings in profits Other companies basically having corruptively marginal changes in their performance. So overall, the segment is made profit of 2.6 billion check rounds, which is variance of 4.2 billion. volume of electricity and gas sold. Year-on-year change in electricity and natural gas supplies is 11%. This is mainly due to extremely warm winter, so consumption of both gas and electricity went down. We had a slight change in customer base of 1%, negative, but this is a reaction to the times when we gained about 300,000 customers from collapse of a few operators in 2021 and 2022. Now, actually, we have a 1% decline mainly due to customers who are always seeking the best offer that are always part of our portfolio. So that's the main reason. And of course, we are always discussing optimization of the number of customers and margin per customer. So it's not necessary to keep all customers. to simply say. Revenue from sales of energy services are growing in all our segments. Germany clearly had a large jump due to acquisition of a few companies. Year on year we expect mainly organic growth, but nevertheless in Germany we expect 13% growth. In Czech Republic we expect decline but this is due to major contracts one of contracts that we actually had in our group and especially decrease in commodity prices where we had a significant profit on our corporate customers actually in the first quarter of 2023 compared to 2024. Overall the segment will be growing by four percent four year numbers estimated three numbers sales for the 3.8 Bering Czech crowns. And that's basically it. You have a lot of information and appendices. So now I think we are open for questions and answers.

Yes. So if you have a question, just raise your hand. I will call your name and you can ask your question. We have the first question from Anna Webb.

Yes, hi, Anna Webb from UBS. Thank you for taking my question. Two from me, if I can. Firstly, on the nuclear, as you said on the slides, you've got the approval for the support framework from the European Commission in the last couple of weeks for the first unit. One thing I'd like to understand is, It mentions measures to protect CHES against changes in legislative or regulatory environment. But I wondered if you could help us understand more broadly how much risk CHES has to bear for cost and time overruns. We've seen very significant overruns in recent nuclear projects in Europe, for example, Hinkley Point in the UK. So just wondering what kind of protection you have from potential additional costs and how they're considered protected. when calculating a fair return under the CFD framework. Any detail you could provide there would be really helpful. And then secondly, on the Polish assets that you've got up for sale, I think I saw some headlines this morning saying that you expect to make a decision this year. But can you give us a bit more detail on whether you're seeing good interest in these assets at reasonable valuation? And if you don't receive satisfactory offers, what's the next step for these assets? Would you consider decommissioning those yourself? Thank you very much.

Thank you. So I'll answer the questions first. Nuclear, the structure is that we actually are now financing the first stage, which is up to 180 million euros, basically getting it to the selection of the winner. Then after actually we move to an interface and the winner is selected and the work starts, It will be financed directly through the state budget with interest free loan. We will get a CFD at the end. And in the middle, of course, if things go wrong, we have a maximum, we have some exposure, but limited for about 1.7 billion euros. This is maximum that is at risk if things go wrong. On our side, as our fault, Everything else will be covered by state. And this should be reflected in the agreement on CFD anyway, so that the profitability for us is there. And we also have a system of call and put options so that if things go terribly wrong, you'll be able to put the project on the government or the government will be able to call the project. So that's what it is. Of course, the details have to be negotiated and nailed down, but this is how the system should work, as we realize that there is a huge risk of budget overruns, as it can be seen basically on most of the projects. The biggest issue is also financing, where a few more years of construction means added cost on interest. And that's why actually the government support and financing is interest-free until the commissioning of the plant, when it starts generating cash, only then actually interest kicks in. So that's the model. The second question was actually related to Polish assets. We are now going through the stage of collecting non-binding offers. We can see much stronger demand than when we were trying to sell the assets a few years ago. After we actually analyze the non-binding bids, we will proceed with selected bidders to the next stage, to due diligence stage, and actually see what happens and the decision whether we sell or don't sell should definitely be made this year. will be definitely made this year. If we don't sell, for whatever reasons, we don't agree on price or the bidders will not be able to put together financing, whatever can happen, we would definitely not want to stay and generate power from coal assets in Poland. So we will have to seek a different route of how to divest those assets and, of course, decommissioning those assets could be one of the options and maybe selling the land as a brownfield for another potential investment could be a choice.

Great, very helpful. Thank you very much.

We can take the next question from Artur Sibon.

Hello, thank you for taking my question. The first one is on the 2024 financial targets, both on EBITDA and on net income. I've noticed that the divisional breakdown that you provide on EBITDA is actually slightly better than it was at the full year results. And so I was wondering if basically that means that you are tracking ahead of your initial guidance midpoint at the moment or if there are any negatives in the second part of the year that we should have in mind that should offset the strength of your EBITDA in Q1. The second question, is a follow-up on the state aid approval on the new nuclear unit, especially on the CFD. So you talked a bit about the financing. I was wondering what would be the potential implications for the for the current chess group structure. Does it mean that the current group structure is adequate to implement this agreement that has been approved or will any change be needed? Thank you very much.

So, first question, actually. I think we still, although we are kind of, you could think, ahead of our target, Our business is very seasonal. When you look at the past many years, the first quarter is by far the strongest. This question comes, of course, every time. Towards the end of the year, it is more and more difficult. We had quarters when we were close to zero on net income, mainly YouTube, various asset write-offs and so on, which we don't expect. If we expected them, we would have done it already. but we don't know how the situation will develop, of course. So now actually we feel very comfortable with the range that we provided that we should be definitely getting there. But should we be sure that the guidance could be approved, we would have done it. So basically another review will come before 10th of August when we are presenting or 8th of August, I don't remember the date exactly. when we present our numbers for the first half of this year. So that's where we are actually on our guidance. And state aid approval structure, the deal is structured in such a way that actually it is the financing will be provided to our subsidiary. So not to us, but subsidiary, SPV, that is holding actually land and employees who are working on the project. and therefore anytime it can be disposed into state hands if things don't go according to expectation and basically nothing touches our structure. So we don't accept the debt on the corporate level and push it down to the nuclear unit project, but it is direct financing actually of SPV.

Thank you very much.

We can take the next question from Michal Kozak.

Yes, thank you. I have two questions. The first one on the seasonality on nuclear area in the first quarter. Could you give us more details on the reasons for such a high seasonality? Because I don't think it's only volumes and it appears that we should see strong decline in nuclear EBITDA in the next quarter regarding your segment guidance. And the second question, can you say something more about your today guidance or target on net depth EBITDA growth from one to three? What is the time horizon? What are the largest capex positions? You mentioned earlier that you want to focus on distribution renewables, gas and nuclear plants.

Thank you. Thank you for the questions. Nuclear EBITDA, as I commented, 19 billion is actually impacted, or more than 19 billion is impacted by the fact that actually last year we had a levy of 10 billion, which mainly related to nuclear assets. There were price caps on the assets. And of course, coal plants really were not impacted, but nuclear plants were impacted. in the first quarter of last year. So we actually had now 10 billion lower cost. And if you actually take the same amount, or if you would actually add those 10 billion, you would be basically on the even numbers for the first quarter of 2023 and 2024. Nuclear plants also have outages. plans usually done during summer months, you know, so it's really, it kind of really is, you know, in accordance with our expectation. So that's the nuclear EBITDA for three months. The net debt to EBITDA target or limit, I would better call it is three. Net debt to EBITDA, what EBITDA would be in the future. And our CAPEX plans are mainly directed to the development of renewables in the Czech Republic, then replacement of coal plants with gas fleet. As profitability of coal plants is declining fairly quickly, and we need something to temporarily replace those plants until the moment we have enough renewables and nuclear plants. and this is all subject to introduction of capacity payment system without which it would be difficult to take a risk of building CCGTs that make just electricity and not gas and not heat. And of course, we start first actually, plants will be conversions in heat business. And the third one is actually, as I said, distribution. We still invest quite a lot of money into our distribution assets, improving our grid, connecting new customers, connecting new renewables. All this requires relatively high capex. So those are the main areas of capex. And of course, then development in ESCO, there it is mainly about financial investments. And of course, the largest amount that will increase our debt is acquisition of GasNet. Actually, consolidating GasNet would mean that we'll be consolidating their debt and their EBITDA as well. And I think they have net debt to EBITDA something like five as they are regulated asset. In such a case, if we receive all regulatory approvals, and we believe we will, we will be able to increase our net debt target ratio to above 3, to something like 3.3, 3.5 maximum. Thank you very much.

Just one question. You can find our five-year CAPEX outlook in the annual report, where you can see the segmental breakdown and the figures for the years of 2023 until 2028. We can take the next question from Piotr Jenczolowski.

Hi, good afternoon. It's Piotr Jenczolowski from Citi. So I have a few questions. Let me start with the first one. So is the current structure for the new Nucla really excluding the option for the breakup of the company and the buyout of the minorities? And second, in this structure, how much equity will have to put into the subsidiary?

Okay, so maximum equity, if things go wrong over the 11-year project construction, that we would have to put would be something like 1.7 billion euros, which is so-called contingent equity. And that's it, there's a gap, no more. If things don't go wrong, we wouldn't. And they only have to go wrong because of us, not, for example, because of a supplier of the nuclear unit. The rest is financed by state, whatever it is. Buyout of minorities, I think, of course, it's a question to the Ministry of Finance rather than to us, but we don't see any signals on the market that this would be an issue because they just received actually notification approval from EU Commission based on this model. So I don't think they really see a need to buy minorities to be able to carry on this project. And for us, when we take care of all the risks, budget overruns and have a put options to be able to put the project on state, then the risk is fairly minimum for us as well. And also that's basically this big scheme that is in place today.

Okay. And can I please ask you the next three reactors, how do you see the structure for them? Would that be done in a similar way for you or there would be another third party involved in it?

So this is only structure for one reactor. If it is more than one reactor, it has to be different approach, different structure. and new notification, you know.

Okay, but is that possible that, let's say, for the second reactor you do the same way, so you provide kind of into SPV another 1.7 billion and you do the same structure and then... I don't think we would be able to afford it, actually.

So there would have to be a different structure. I think 1.7 billion is a maximum that we could do, but we couldn't do two times 1.7 billion, I think. we would have to really uh this is a structure for one reactor if it's more than one we have to find a different one and probably different uh a new notification but so far so far we are seeing one reactor you know and we received notification for one reactor only so we cannot really multiply it by two three or four

Can I please ask you a last question? How do you think about the dividend policy in the context of your capex plans and getting to a three times leverage plus the new nuclear development? How do you think, you know, what's the right payout and when this could be really reached?

Well, our officially announced dividend policy where we actually were proposing dividend for 2022 is 60% to 80% of adjusted income. However, shareholders may decide differently, as they did last year in the shareholder meeting. The Ministry of Finance filed a proposal that moved dividend higher, but so far we are seeing income of 60% to 80%, that's sufficient range for dividend.

I'm asking more not about the 22% payout, but more like 2027 to 2030, when you start all of the investments and your balance sheet is full, do you think the company can sustain 60 to 80% payout or the long term ultimate payout needs to be lower?

You know, we are very far from 2027 to 2028. It depends on the power prices, depends on the cost of investment, depends on the profitability of the projects. It may happen that they will not be in the money and that's why you would not do them. And it makes your situation, it changes your situation as well. So we understand that all shareholders are buying our shares because of the dividend. It is a dividend stock, mature company. So we have to balance those things very well. But 2027 and 2028 is far from now.

Okay. Thank you very much for the answers.

We have a question from Robert Mai.

Yes, hi. Yes, hi. It's Robert Marr from IPUPIMA Securities. On the CAPEX plan, I'm trying to get my head around the numbers which you plan for 2024 or this year. Are you on track of reaching the CAPEX from your guidance? And on the new nuclear, I mean, is this 1.7 billion euro included in those numbers you mentioned you provide in the last financial 2023 report? Or is it outside of this? And the second question on the sales segment performance in the first quarter. I mean, the result was quite good. And I just wonder if this is something that would be repeatable in the following quarter. So last year we had a loss in the first quarter and in the fourth quarter. And in the middle, there was a positive result. So how the margin over there would evolve in the following quarters in 2024? Thank you.

I think in our CAPEX plans, we have only 180 million euros invested into the nuclear project. Nothing else, because those 1.7 billion will really be drawn during the construction phase, which is years from now. If things go wrong, you know, and it's our fault. So we really, it is definitely beyond our five year budget that we do. And regarding sales segment, sales segment was extremely volatile in 2022 and 23, as you could see on the results. In the past, when prices were more stable, their result was also more stable, always generating positive EBITDA. And if nothing really significant changes, you would expect that they would be back into normal pace of profit generation.

And so what will be the capex for 2024, if you can just remind us?

I think it is.

We announced 57 billion Czech crowns, expectation for 24.

That's more than 45 last year, right? So the difference, and this is without Gassnet, right? This is without Gassnet, yes. Okay, so the majority would go where in the ESCO business? The difference between this year 57 billion in guidance and the last year? Where the money would go?

It is across various segments. One is increased spending in nuclear, both into the nuclear fuel and some increased maintenance. We are starting working on the first gas projects and we expect basically ramp-up in the CAPEX in the renewables.

Okay, and when the gas net would be consolidated, I reckon it could be the third quarter, so I guess that around the second quarter result publication you would increase your guidance, right? Because simply of adding this 10 billion of EBDA for Gaston, am I right? If we consolidate with Gaston, we will put them into numbers, of course. And this, we should think about third quarter as the first time when you will consolidate, if you consolidate, right?

Probably, you know, and if we, you know, it depends really whether we will be able to acquire it in the second quarter, which we haven't been able to or probably third quarter, depending on regulatory approvals, you know.

As we mentioned, we are waiting for the approval from the European Commission and we don't know the timing, so we don't know when we will consolidate. We have a follow-up question from Artur Sibon.

Yes, thank you very much. Apologies for the third question. I was just wondering if you could provide an update on the evolution of the windfall tax in the Czech Republic, specifically thinking of 2025. Thank you very much.

Okay, so, you know, we have heard from public resources, comments from the Ministry of Finance and the Ministry of Finance that the government is strongly thinking of basically discontinuing this tax for 2025. We also heard that they might be thinking again about 24, but some political parties in the coalition are against it, some support it, so let's see. So hopefully 25 will be almost certain, but on the other hand, no legal initiative has been taken. On the other hand, it's very simple. It's just changing one sentence in the law. You don't have to do any complicated change to the law. So basically erase 2025 or even 2024, which would be probably too optimistic, but let's see. So this is where the public debate is actually heading to today.

Thank you very much.

Andrzej Rembelski.

Hi, Andrzej PKWP Securities. Thank you for the presentation. Just one question from my side. So what's your opinion from the point of view of key market player? Do you think that the four nuclear reactors in the Czech Republic are essential for the system in the upcoming years or do you think that maybe one or two more units would be more reasonable? Thank you.

I think from energy point of view we can clearly see future trend into more and more using electricity versus other kinds of fuel. and our fleet will be discontinued within a few decades. Coal plants fairly quickly. Older Dukovany plant does not have an indefinite lifetime either. So clearly, just replacing current nuclear plant in Dukovany is 2,000 megawatts. Replacing capacity in coal plants is even more. And gas pumps will be kind of transitional technology, which still generates some CO2. And we are not definitely talking about building them all at once. So this is a project for decades. So from an energy point of view, we can see a need. It depends on what will be the pace of such a construction.

We have another question from Piotr Dzienskowski.

Thank you for letting me ask the follow-up question. I have a question about the CFD structure for the new NUPLA. How should we think about the level of it, given that funding is provided by the government? What is basically the return you possibly could get on your 1.7 billion equity injection into the company? And second question, I wanted to ask you about You know, you're kind of a higher capex for the nuclear reinvestments. What is the capex you need to spend to refurbish the existing nuclear plant? How much per plant or for all of the Ducovan and Tamerlane, how much and when you have to spend to keep them running?

So I will answer the equity question. Of course, we would expect through CFD to receive return on equity that we will provide that relates to standard, let's say, generation projects, whatever level of return, equity it is. So standard return on standard generation project, that's what we would expect. And this should be actually built into CFD in the future. So that's the answer and the detail on the CAPEX will provide Barbara.

On the maintenance of the nuclear fleet, historically we were spending typically between 4 and 5 billion CZK a year. Now as the plants are getting older and we have inflation going forward in 2024 to 2027, we expect maintenance capex at around 8 billion CZK per year for two units together.

But do you have to go into, like, for example, you take the other reactors across Europe, they have to go through, I don't know, 10 year revisions. And at that point, you know, EDF had a program whereby they spent like, you know, almost a billion per plant in retrofitting them to give them another 10 years. Or you take for Tumlovisa, they also spend a billion per for extension, do you have to do the same? Because that would be quite substantial in your case, given your capacity in nuclear.

No, we don't have it this way. We actually used to have 10-year tenors and now it changed to indefinite tenor, but you have to fulfill certain criteria. So that's how the licensing is done in the past few years. until you are able to fulfill criteria and it's economic to do that, you can go forward. And actually, I think estimated lifetime of book money, we are looking at extending the lifetime up to 60 years, if I'm not mistaken. And so that's what we are aiming at. And of course, past 10 years would be probably most expensive in terms of capex. on the other hand still very profitable so it's much much better to maintain current nuclear plant than to build a new one you know simply says no no that's that's that's clear thank you very much

Okay, it seems that we do not have any further questions, so let's finish this call. As always, the Investor Relations Department is available for any follow-ups on a one-on-one basis. Thank you very much and goodbye.

Goodbye.