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Edited Transcript of CEZ.PR earnings conference call or presentation 12-Nov-19 3:00pm GMT

Nine Months 2019 CEZ as Earnings Call

Prague Nov 27, 2019 (Thomson StreetEvents) -- Edited Transcript of CEZ as earnings conference call or presentation Tuesday, November 12, 2019 at 3:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Barbara Seidlová

CEZ, a. s. - Head of IR

* Ludek Horn

CEZ, a. s. - Head of Front Office

* Martin Novák

CEZ, a. s. - Vice Chairman & CFO

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Conference Call Participants

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* Arthur Sitbon

Morgan Stanley, Research Division - Equity Analyst

* Bram Buring

Wood & Company Financial Services, a.s., Research Division - Equity Analyst

* Elchin Mammadov

Bloomberg Intelligence - Utilities Analyst

* Teresa Schinwald

Raiffeisen CENTROBANK AG, Research Division - Chief analyst

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Presentation

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Operator [1]

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Ladies and gentlemen, welcome to the conference call of CEZ. At our customer's request, this conference will be recorded. (Operator Instructions). May I now hand you over to Barbara Seidlová who will lead you through this conference. Please go ahead.

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Barbara Seidlová, CEZ, a. s. - Head of IR [2]

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Thank you, operator. Hello, ladies and gentlemen. Welcome on our regular quarterly call. The presentation will be given, as usual, by Martin Novák, our Chief Financial Officer. And later on, we will be joined by Ludek Horn, our Head of Trading, who will be also available to you to answer your questions.

Now I'm handing over to Martin.

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Martin Novák, CEZ, a. s. - Vice Chairman & CFO [3]

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Good afternoon, good morning, everybody. So I'll quickly go through the presentation that you have already seen and point out only important parts. So when you look at the first slide, actually, you can see that we are growing in all metrics -- comparable metrics compared to -- with last year. Our EBITDA is growing by 16% or by CZK 6 billion to CZK 44.7 billion. Net income growing by 49% to CZK 13.6 billion actually, and net adjusted income to CZK 14.7 billion or 30%. Operating cash flow is better by 11% and reached CZK 40.5 billion, and CapEx has grown by 22% or CZK 3.3 billion.

When you look at the next slide, you can see that the variance between Q1 through Q3 2018 EBITDA and first 9 months of 2019. There are 2 big items that are worth mentioning. One is actually CZK 6.6 billion variance in generation-traditional energy segment, out of which CZK 6.8 billion is actually attributable to higher power prices and better trading results. It's partly offset by higher expense on emission allowances that we have to buy. And we have to buy more and more of those because we get less and less of them for free, but we still do get some. So CZK 1.2 billion is actual difference between the volume and also -- it also includes the fact that carbon credits are more expensive than they were in the past.

Extraordinary effect of a core decision for us to return CZK 1.3 billion, that I will cover on later -- one of the later slides and I will explain later, actually influenced the sales segment negatively. So negative variances 1.5 and 1.3 is actually the core decision where we had to return back CZK 1.3 billion and, of course we had to account for it.

Other income expenses. EBITDA, as you see in the first line item, 16% better, then most of the lines are basically very similar to last year. The one that is actually worth mentioning is income and expenses from investments and securities, which relates to our Turkish business. There is a positive year-on-year difference in this line of CZK 1 billion, mainly due to depreciation of Turkish lira in 2018. So it's basically related to foreign exchange losses, which did not happen in 2019. And it was actually a better situation. So there's plus CZK 1 billion. Otherwise, all items are basically in line with as I explained in the presentation.

In the next slide, you can see important numbers. We confirm our EBITDA or we kind of set more precise number. Last quarter, we still had interval on EBITDA of 57 to -- range on EBITDA, CZK 57 billion to CZK 59 billion. Now we think it will be more likely around CZK 58 billion. Why we actually kind of shrink or narrowing down on the range to 1 number. Basically, CZK 59 billion was an opportunity if the payment of CZK 1.3 billion to railway authority that I already mentioned and will talk about later on would not materialize, and unfortunately, it did. So that's why we are coming back to CZK 58 billion, which is kind of the middle -- mid of the range. But still CZK 57 billion or CZK 58 billion, we are more on a positive side. So basically, we believe that CZK 58 billion should be achievable.

We also narrowed down the range on net income from CZK 17 billion to CZK 19 billion. Now it is CZK 17 billion to CZK 18 billion. Really, again, it's because of materializing the risk of returning CZK 1.3 billion to railway authority. And why it's not one number, because there is much more uncertainties in net income like foreign exchange differences and many other items that can influence the result. So that's why we keep the range versus giving just 1 number.

Sale of assets abroad. Big news, actually, in the past months, weeks or days even. First of all, I will start with the bottom part of the slide, sales of Bulgarian assets. So as you know, we agreed with Bulgarian company called Eurohold on sale of our assets to them. They are insurance group active in Bulgaria. They are listed on Sofia Stock Exchange. On 21st of October, Bulgarian anti-monopoly office rejected the transaction, and we actually appealed against the decision in the court. So now we are suing actually anti-monopoly office, and we would like this decision to be canceled by the court because we don't believe it has any point -- it had any point.

Basically, what they say is that combining insurance company -- or insurance company buying electricity distributor and sales -- distribution and sales business would confuse customers whether they are insurance or they are actually the business and will lead to some cross-selling, which is normal. And cross-selling is day-to-day business of every company these days. Many companies not only sell the key products, but they also sell many other products, including, for example, us selling insurance and credit cards, and we are in a phone business, I mean, retail actually and vice versa. You have banks selling electricity also, that's kind of a normal thing. So we don't believe that this is correct, and we had appealed to the court. We don't know how long it might take. It will definitely not materialize before the end of the year, and let's see what happens next year. Those things may take months, but they can take even longer.

Coming back to the top of the slide. Second sale actually is a sale of Romanian assets where we have distribution and sales business, big renewables, which is 240 turbines or 600 megawatts in wind. And we also have little hydro plant, also some other renewables. We have started officially on September 9 when the divestment was published on our website with relevant issued financial plans. We got more than 30 companies that actually expressed their interest in bidding. We are expecting binding -- nonbinding bids, actually, by the end of this year. And then we would like them to submit final bids, those who will actually get to the next round, final bids by, let's say, summer of next year. And we would like to close the transaction, sign the deal later on in 2020 and actually set to hand over the assets in 2021, in first half 2021. Assets are for sale both individually. So companies can bid for individual pieces of the assets, which we sell distribution renewables, or they can send other bids actually willing to buy everything, and it will be up to us to choose what is the best combination of the offers that will maximize our value.

Sale of Polish assets will be following right after Romania. So we are planning actually to start the process by mid-2020. These days, we are working on restructuring our Polish business to make it easily sellable to anybody who would be interested. So basically, unwinding it from our internal structure and that should be finished by the mid of next year when we would like to start the process. And again, the transaction should be completed in 2021.

Other events are actually on the next slide where you can see that in September we acquired stake in Polish company, Euroklimat, which is HVAC market leader in Poland. Our venture Capital fund, Inven Capital, invested into a German company, zolar, that is a provider of digital solutions for rooftop photovoltaics. Then we also received from Ministry of Environment favorable binding opinion on EIA, which is now valid for 7 years and can be renewed 5 years -- for 5 years. Then we also entered into partnership with U.S. company, NuScale, in September exploring possibilities of potential deployment of small scale modular reactors. The first commercial reactor should be put into operation in the U.S. in Idaho installed in '27.

Then -- now actually the last slide in this section. As I already commented, we had to pay CZK 1.3 billion to railway authority. This dates back to 2010, which is the year for which railway authority contracted electricity from us, but then -- but did not actually do back-to-back deal with their customers, mainly Czech Railways, and basically, when they came to Czech Railways with electricity contracted from CEZ 6 months later after they signed with us, the price in the meantime fell on the power exchange and Czech Railways decided not to take this offer from railway authority and bought the electricity directly. And of course, we had a loss, this is a difference between for how much the power was contracted and for how much it was really delivered because the railway authority never actually took the power from us. And we won the court. We got paid actually CZK 1.1 billion. In 2015, the railway authority appealed and now, actually, they won the court. So we lost it and we had to pay back. However, we are appealing again, so we hope that we will be successful in this. But so far, we had to pay back CZK 1.3 billion, which includes interest. And that's why we had to book for -- account for this.

We also had very similar issue in 2011 -- electricity because they contracted 2 years. But in that case, actually, we did not receive any money from them. And that case is actually put aside for courts to wait how 2010 issue will be resolved, and after it is finally resolved, they will probably decide very quickly on 2011 the same way as with 2010 as there will be a clear precedence.

So now let's take a look at the results of development team, which is the sales, distribution and ESCO activities and renewables. ESCO companies' sales are growing significantly, first 9 months compared to previous year, a 33% growth; 12 months, actually, 42% growth, coming mainly from Germany where we are going through M&A-driven growth. So we actually acquired company called Kofler Energies, then En.plus and Hermos, and those companies were not in our numbers last year or there but only part of it. Also, some of them -- so that's the main source of the growth.

In the Czech Republic and Slovakia, 22% growth, again, new acquisitions in late 2018 and some organic growth. And other businesses, organic growth of our Polish company Metrolog and acquisition of High-Tech Clima in Romania that we started consolidating from December 12, 2018.

Electricity generation. Actually, in new energy segments, we are looking at 16% increase from 1.4 to 1.6 terawatt hours, mainly in Germany and Romania. There are 2 factors. In both cases, it rose by 8%. In both cases, it's because 2018 was fairly weak year. We have wind farms in both countries and 2018 was not very windy year. So when we are going back to standard wind conditions, we actually can see growth of those 8% year-on-year. And in the Czech Republic, we actually had a growth of 38%, which mainly includes -- inclusion of CEZ Energo company, which was our JV with another partner. And now we actually fully consolidated companies. We gained -- we have gained control over the company. So year-on-year, full year, we actually plan to increase our power generation by 13% from 2 to 2.2 terawatt hours.

On next slide, you can see generation new energy EBITDA. So EBITDA has grown by 12%, CZK 2.8 billion versus CZK 3.2 billion. Czech Republic basically flat. Romania and Germany growing, mainly because of higher amount of electricity generated through higher wind factors.

Segment sales. There is a pretty significant decrease in Czech Republic. From CZK 2.7 billion, it went down to CZK 1 billion, change of CZK 1.8 billion, but CZK 1.3 billion out of CZK 1.8 billion is actually attributable to this railway authority case where we returned CZK 1.3 billion, and that's why we have so -- such a negative variance. Remaining part is attributable to power prices growing where we are lagging in passing through increased power prices to our customers. This is catching up these days, but it's a long-term process just because many customers have fixed contracts.

Germany, Romania, Bulgaria, in nominal terms relatively small variations and -- in percentage terms, relatively large, actually, and explanations are again on the bottom of the slide, usually one-off items. For example, in 2018, 4 acquisitions in case of Germany.

Segment distribution. Czech distribution, a little bit better, 3% improvement or CZK 300 million. Romania, a little bit lower due to higher purchase prices of electricity to cover grid losses. Bulgaria, a little improvement. We have lower impairments and higher margins due to sales. So in total, segment Distribution is CZK 15.3 billion versus CZK 14.8 billion in 2018.

Now we will switch to operations team. Operations team is a traditional energy team, which means lignite, hard coal, gas and nuclear power generation plus all support services and mining equities. So when you look at generation -- traditional energy segment, you can see year-on-year increase of 2% in power generation, 44.3 versus 45.1. In lignite generation, there is a decrease of 5%, mainly due to lower generation at a few lignite plants and also gross margin optimization in Poland, 14% (sic) [13%] decrease there.

Nuclear plants were basically flat or 1% down due to the second unit outage at Dukovany 2 during summer. And then there is segment, other regions, grown by 80% from 2.4 to 4.3, which is mainly our power plant in Pocerady. It's actually gas plant, CCGT. This gas plant would normally be a peaking plant, but basically in 2019 it's running in a daily -- on a daily -- as a baseload pump. The main reason for that is that there are very low -- historically lower natural gas prices. And when we take actually those gas prices into account, 1/3 of carbon credit, then you need to make 1 megawatt hour of gas power, and compared with power prices, then the margin is fairly interesting and fairly positive. So we are running the plant full speed. This is something that will probably remain by the end of the year, that's probably about 72% increase in this segment year-on-year, and we plan to generate 6 terawatt hours of electricity or something like 10% of our volume. Nuclear plants should improve by 1% to 30.4 terawatt hours, so we will be above 30 terawatt hours. And lignite plants will be 3% down, mainly due to longer outages at some of the plants.

When we look at it from monetary terms, our EBITDA in the Czech Republic has increased by 55% or CZK 6.7 billion from CZK 12.2 billion to CZK 18.9 billion, vast majority coming from better power prices and better trading results. There are a few offsetting factors like more expensive carbon credit that I've already described. But generally, we can see uplift in earnings coming from higher prices. So many people ask was then 2018 the bottom? It looks like it was, and now 2019 is definitely looking much better than 2018.

Poland decreased by 2% -- by CZK 200 million or 26%. Higher prices of biomass and increased expenses on allowances, that's also because we are getting less, not only in Czech Republic but also in Poland.

Mining segment and support services. In mining, we have improved by CZK 200 million in our EBITDA or 5%. And in support services, basically flat CZK 1.1 billion versus CZK 1.1 billion last year.

Important slides on hedging. Last slide, actually. Here you can see what is the amount of hedged electricity for 2020, '21, '22 and '23. In the orange bubbles, we can see average achieved price so far, which is now -- when we look at prices around 50 being actually increased through future sales, you will also see the cost of the carbon credits that we have in our table and then the level of euro hedges.

We had some comments that did not -- were misunderstood item -- line item below. The foreign exchange position for 2020 is hedged at an average rate of 26.75 whereas some of the people thought that we were actually buying at this rate. No, we are selling euro at this rate. So market rate today is 25.60 or something, but -- 25.50 and actually our hedged position is 26.75. We are not buying euros, we are selling euros because we get euros and we need to sell it to get Czech crowns to pay our cost in local currency.

So that's all for me. And now I think we can switch to answer some questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions) And we have received the first question. It is from Elchin Mammadov of Bloomberg Intelligence.

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Elchin Mammadov, Bloomberg Intelligence - Utilities Analyst [2]

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I have 3 questions, please. The first one is on your 2019 guidance. You mentioned better-than-expected results in trading and retail. From what I understand, the retail was partly due to acquisitions, but could you please talk more about better-than-expected results in trading? What drove that? And do you expect it to continue in Q4?

The second question is on power generation output. You have downgraded your full year estimate for that. So I wanted to check what drove that downgrade? And also, how you expect your power generation volume to develop in 2020 vis-à-vis 2019?

And the last question is on legal disputes. So first one is on Bulgaria sale. What are your options if the court ruling is unfavorable to CEZ? Because I guess you've appealed that decision by the regulator. So if the court ruling is unfavorable, what are your other options? And the second question is on legal dispute regarding the SŽDC. Do I understand correctly that there is no upside for CEZ in terms of compensation from that lawsuit? Or did I misunderstand it? That's all for me. Thank you.

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Martin Novák, CEZ, a. s. - Vice Chairman & CFO [3]

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Okay. So I'll answer the questions, and if my colleague from trading wants to -- Ludek wants to say something, then he will do it after I'm finished. So 2019 guidance, we said that retail and trading, we meant more -- when I said higher prices, it's not from retail, it's coming from selling power through power exchange. So it's CZK 0.8 billion in generation segment. Retail was actually impacted by the negative for decision on the -- of CZK 1.3 billion that I will discuss later. And when I talk about trading, I mean, actually prop trading, speculative trading, which will be finalized by the end of the year. You expect this to be low billions of crowns as always. So we will disclose the number after year-end so that we will be able to see how much it is. So -- but we are doing better than originally planned in prop trading.

Power generation, why is it down? It is little down, and it's mainly due to longer outages at lignite and hard coal plants just because it took longer to fix the plants and because we are optimizing in Poland, as I explained, 13% down because of plant optimization and also limitations in terms of our ability to generate due to emissions.

And legal dispute -- legal disputes. The one actually with railway authority, we expect there can be an upside. We expect that we will get the money back from them again, and not only for 2000 (sic) [2010] but also 2011, because basically court ruled at the beginning that, yes, they entered into contracts that proved itself not to be that juicy for them as they originally thought. But -- and that's why they should pay us. And that's what they did. Second court came and said the market was not liberal for long enough, so they were kind of not -- they were not necessarily supposed to kind of get the news that the market is already liberal, and that's why their position became open and not closed by immediate back-to-back deals with Czech Railways, which we dispute and say that, that's a good argument if you are a person from the street, who is not an expert in business issue, but when you are leading, managing business, you should be on a different level of education, let's say.

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Elchin Mammadov, Bloomberg Intelligence - Utilities Analyst [4]

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Yes.

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Martin Novák, CEZ, a. s. - Vice Chairman & CFO [5]

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And so that's the one on the possible upside. But now actually, the downside materialized. So basically, upside materialized in 2015 when we got the money and it went from our P&L. And now returning money, we actually got back where we used to be before 2015. So we hope we will get the money back again and, hopefully, for 2 years. But of course, nobody can be certain. If I look at it, if I want to be a little bit kind of -- to give an example, it's very similar that if you come to bank and fix your mortgage for 5 years, the rate. And then after 2 years, the rate falls down and you come to bank and say, "I'm not going to pay you 3%, I will pay you 2% because it's not anymore in my favor, okay?" Very similar, right? And so -- so that's why we hope that finally we will win the case, but of course, with the courts, we never know. So that's the answers on the questions. You had also -- there was 1 in the legal disputes, 1 other question...

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Elchin Mammadov, Bloomberg Intelligence - Utilities Analyst [6]

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Bulgaria.

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Martin Novák, CEZ, a. s. - Vice Chairman & CFO [7]

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Bulgaria. In case of Bulgaria, in case the court will not actually cancel this (foreign language) and we will go through all the appeals that we can go through, and the transaction will not happen. We will probably keep the assets for a while and sell them -- and try to sell them later on. But as we've already said, we will probably not immediately start another round of sales process. So that's what it is. But so far, we are far from that decision.

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Ludek Horn, CEZ, a. s. - Head of Front Office [8]

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Hello, this is Ludek Horn speaking. I would add a couple of words on the trading questions. We are in the middle of Q4, so you've seen what we've managed to add on the results for the first 3 quarters. So hopefully, it will be a little better, but not a big difference and the reason why we are that successful this year is that our team is, I think, more mature and is able to realize favorable market conditions and volatility. And of course, we have, again, a little bit more traders and more analysts. So partially extended answer and partially (inaudible).

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Operator [9]

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The next question we've received is from Bram Buring of Wood & Company.

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Bram Buring, Wood & Company Financial Services, a.s., Research Division - Equity Analyst [10]

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Two questions. First, going back to the lignite fleet, I'm thinking specifically in the Czech Republic -- Poland, that's a good point as well. How much of this was -- the decline was really maintenance outages? And how much, say, could we attribute to the fact that you need to have an optimized production at some of the new plants? That's the first question. And the second is, if you could comment on the current state of play of this contract between you and the government regarding new nuclear. I thought that it was supposed to be resolved and the contract was supposed to be done by the end of the year. We're getting close to that. What, if anything, can you say with regards to what the government is willing to give -- what you're asking for in terms of assurances and what the government is willing to give?

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Martin Novák, CEZ, a. s. - Vice Chairman & CFO [11]

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So lignite fleet, I think vast majority is related to maintenance in the Czech Republic. Definitely, no optimization on the new plant. You usually do -- you do optimization on your old plants, for example Poland, when you are limited with certain amount of emissions and your plant has sizable amount of those emissions and that's why you have to think when you run it, what are the best conditions to run it to maximize your profit? In the Czech Republic, we don't have such an issue as basically all those new -- plants are new, so it's all maintenance. And again, the decline is fairly small. It's nothing severe or significant. Nuclear...

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Bram Buring, Wood & Company Financial Services, a.s., Research Division - Equity Analyst [12]

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But that means the issue is now done with?

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Martin Novák, CEZ, a. s. - Vice Chairman & CFO [13]

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Yes, we are...

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Bram Buring, Wood & Company Financial Services, a.s., Research Division - Equity Analyst [14]

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Run in full capacity in the fourth quarter? All right.

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Martin Novák, CEZ, a. s. - Vice Chairman & CFO [15]

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So with lignite plants, you will never run full capacity. Lignite plants are something that is running at lower capacity than nuclear, for example. But we are running at full capacity given those are lignite plants. And then nuclear contract. I think tomorrow there is actually another round of discussions at the nuclear committee of government. So hopefully, there will be some news from that committee where also our colleagues are participating now. We are actually discussing the frame contract, which would take into consideration the investors model, which would actually resolve the way how such investments should be made and what will be -- who will bear which type of risk. And then Phase 1 contract will be negotiated, which means the contract for the phase for that would actually include tendering basically and permitting process. So no CapEx. And that's -- and that's basically the second stage. So I would wait for what will be public tomorrow. Those things, actually, if there is a state support, would have to go through notification with you anyway. So it might be done by the end of the year, but it has to go through you, discussions. So it will be definitely something to be seen in 2021. But the wording might be ready by the end of the year, which is true.

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Operator [16]

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Has your question been answered?

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Bram Buring, Wood & Company Financial Services, a.s., Research Division - Equity Analyst [17]

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Yes.

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Operator [18]

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Then we'll go to the next question. It is from Arthur Sitbon of Morgan Stanley.

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Arthur Sitbon, Morgan Stanley, Research Division - Equity Analyst [19]

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I have 3. The first one is a follow-up on the previous question. If I understand you well, basically, tomorrow we should have an agreement on the key principles of the framework to invest in new nuclear. That's just -- I want the confirmation on that.

My second question is, if you could give an indication on where you expect net debt to be at, at the end of this year, 2019?

And the third question I have is, basically for 2020, consensus stands at around CZK 63 billion for EBITDA and CZK 21.5 billion on net income. I wanted to have your thoughts on this number if you feel comfortable with these levels?

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Martin Novák, CEZ, a. s. - Vice Chairman & CFO [20]

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So nuclear, I think you misunderstood. Tomorrow there is another round of discussions. There is actually a committee that kind of looks at what has been done in the past few weeks, months and what is the plan for the future. But tomorrow, there will not be anything agreed or decided. So the discussions, negotiations, individual negotiations with the government are going on. And tomorrow is not the day even though things will be kind of nailed down. For sure, many open issues, open questions. So hopefully, the framework of our corporation will be done by the end of the year and then the detail -- the details will be discussed for the Phase 1. And usually, there is a lot to cover when you talk about details. So basically, our position is that we would like to insulate us from the risks that we will have difficulties to face with -- in power -- in price environment, which we can see today.

Net debt to EBITDA. I think at the beginning of the year, we were at around CZK 3 billion, then it went down to CZK 2.8 billion. So I think this is -- we are comfortable with the level between CZK 2.5 billion, CZK 2.8 billion, which is kind of the healthy level of our EBITDA, supports our rating on A minus level from S&P.

And then 2020, CZK 63 billion and CZK 21.5 billion. We don't comment those numbers. I think I can always say that this is absolutely fair expectation that 2020 should be better than 2019, just when you look at the power prices for 2020 and see how much was already sold, at what price and how much needs to be sold. I think 2020 will be definitely better. It's no secret, but we will announce the number for 2020, actually, on 17th of March, I guess, when we will be holding our press conference and then analyst call for full year 2019 results.

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Operator [21]

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(Operator Instructions) And we've received another question. It is from the (inaudible) of Erste Group.

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Unidentified Analyst, [22]

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I would ask 2 questions. Just when looking at the comparison of this second and third quarter, the production volume was basically very similar and the result in Q3 is quite significantly lower than the Q2 (inaudible) EBITDA in Q2 was 7.5. So if you can elaborate on the difference between Q2 and Q3. Also, you mentioned in the slides that the average price for 2019 is EUR 38. In previous quarter, there was a price of EUR 39. So significantly lower spot prices in Q3 or what's the difference for you?

And second, regarding the methodology changes in valuation of electricity derivatives. Did I understand correctly that Q3 '19 wasn't different to Q3 '18? Or is there a difference in the methodology? In other words, are the 2 quarters, Q3 '18 and Q3 '19 comparable or not in terms of accounting?

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Martin Novák, CEZ, a. s. - Vice Chairman & CFO [23]

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So Q2 and Q3 results, I think the net income is clear (inaudible) is CZK 1.3 billion, and that's why we have a negative (inaudible) quarter. And there was actually -- when we look at -- you asked Q2 versus Q3, the first question, or versus the same quarter of last year?

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Unidentified Analyst, [24]

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Q2 and Q3, sequential.

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Martin Novák, CEZ, a. s. - Vice Chairman & CFO [25]

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So we have actually -- we are also selling some electricity during the year, and it's also an answer to your second question. It's about 10%, usually 10% less for spot market and power prices were actually fairly low during the summer and third quarter. So when we reported 39 as average, now we report something about 38 and that's actually impact of relatively low power price.

And regarding change in valuation, Q3 '19 and Q3 '18, this really is not comparable because we have changed the (inaudible) in terms of this accounting. In the past, we actually hedged our derivatives that are used for hedging forward sales, hopefully, but are actually hedging (inaudible) and we decided to do the valuation more often and not as you remember last year (inaudible) the second quarter, I guess, second half, we did mention the results and this time we actually changed the methodology (inaudible) and now we are [moving] those changes into every quarter. There is a great detail in the presentation -- in the presentation where you can see the details and if you want really the accounting details, then Barbara will guide you through it -- through the IFRS. But it's basically mark-to-market accounting for derivatives.

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Operator [26]

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The next question is a follow-up question of Elchin Mammadov of Bloomberg Intelligence.

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Elchin Mammadov, Bloomberg Intelligence - Utilities Analyst [27]

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Could you quickly remind us when the free CO2 allowances end?

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Martin Novák, CEZ, a. s. - Vice Chairman & CFO [28]

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Free CO2 allowances end next year. I think we still get little less next year or 0, Barbara?

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Barbara Seidlová, CEZ, a. s. - Head of IR [29]

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Yes, next year, we are just getting the allowances for the heat generation. No free allowances for electricity. So we are talking about only 0.3 million tonnes next year for free.

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Martin Novák, CEZ, a. s. - Vice Chairman & CFO [30]

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So basically, as this year is little, we will get little next year.

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Operator [31]

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Then we go to the next question. It is from Teresa Schinwald of Raiffeisen.

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Teresa Schinwald, Raiffeisen CENTROBANK AG, Research Division - Chief analyst [32]

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Most of my questions have been answered. But one, what -- could you give us an overview of the discussions on new regulatory periods and regulation in the Czech Republic as current one's about to end next year for distribution?

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Barbara Seidlová, CEZ, a. s. - Head of IR [33]

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Discussions are still ongoing. The regulator published a draft methodology in August. Basically, most people are interested in outlook for WACC. In the draft report, they are suggesting change in methodology, which results into calculations and to values, one of which leads to a WACC of 6%, the second WACC at 6.5%. This compares to 7.9% at the moment. This draft is up for the consultations. And the final proposal will be published only early next year. And obviously, we will comment on -- submit our comments on all the -- on the parameters including WACC.

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Operator [34]

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Thank you very much. As there no further questions, I would like to hand back to you.

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Barbara Seidlová, CEZ, a. s. - Head of IR [35]

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So thank you, everyone. Thank you for participating. And if you will have some follow-up questions, do not hesitate to contact Investor Relations. Thank you, and goodbye.

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Martin Novák, CEZ, a. s. - Vice Chairman & CFO [36]

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Thank you. Goodbye.

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Operator [37]

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Ladies and gentlemen, thank you for your attendance. This call has been concluded. You may disconnect.