ČEZ Energy Group’s Record Profit in 2022: Factors Affecting 60% Drop in 1Q2023 and Future Outlook

The ČEZ energy group recorded a record profit last year. In the first quarter of this year, however, it fell by 60 percent year-on-year to CZK 10.8 billion. Several factors, which are missing this year, made their way into the 2022 result, while others, on the contrary, cut a part of the profit.

ČEZ’s results reduce, among other things, temporary levies from unexpected profits. “The tax on unexpected profits in the amount of 60 percent over and above the normal tax amounted to nine billion crowns in the first quarter of this year,” says Martin Novák, director of the finance division at ČEZ, in an interview with SZ Byznys.

According to him, like last year’s profit, the historically highest dividend, which ČEZ proposed at 117 CZK per share, will probably not be repeated. “The results of the next few years will depend mainly on the development of commodity market prices and energy regulation in Europe,” explains Novák, adding that energy prices are falling.

ČEZ’s profit in the first quarter of 2023 fell by 60 percent year-on-year to CZK 10.8 billion. Last year’s profit was a record, among other things, due to high energy prices. Why did you make a lower profit this year than a year ago?

In 2022, we sold electricity at relatively higher prices for 2023 than in 2021 for 2022, and thus earned CZK 11 billion more year-on-year. But three main factors had a negative effect on the year-on-year comparison.

The first of these is an extraordinary temporary profit of CZK 7.4 billion, achieved in the first quarter of 2022. This temporary profit was offset by higher costs of the same amount in the following quarters of 2022, but it fundamentally affected the year-on-year comparison of the first quarters. An example of such an item is the sale of emission allowances for production in 2022, which we then implemented in the first quarter due to liquidity management and the satisfaction of high margin requirements for securing sales on stock exchanges.

The second factor is the lower profit from trading activities, i.e. from trading on commodity markets, since price volatility is not as high this year as in the unprecedented 2022.

The third main factor was the introduction of extraordinary measures, i.e. in particular taxes on windfall profits and levies on excessive sales of production to the ceilings set by law.

How did these government mandated factors affect the quarterly result?

Deductions from excessive production sales to the ceilings are set by law and mainly concern sales from the production of nuclear power plants. We pay excess income from the sale of electricity on a monthly basis in the form of advances. And this cost in the first quarter exceeded CZK 10 billion.

The tax on unexpected profits in the amount of 60 percent above the normal tax amounted to nine billion crowns for the first quarter of this year, which will be paid only in September as part of the advance for the first three quarters together with the advance for the ordinary income tax. There were no such costs in the first quarter of last year, so a total of CZK 19 billion is a net change compared to 2022.

Will last year’s record profit be repeated, or was it an isolated case?

If electricity prices remain at the current level or continue to fall, last year’s result will not be repeated. In other words, last year’s unprecedented year with a fundamental change in gas supplies and the enormous increase in electricity prices is unlikely to ever be repeated. Additionally, a windfall tax of 60 percent on top of regular income tax is approved for 2023 to 2025. So last year’s result will be very difficult to repeat in the future and it will be a record year for a long time.

Of course, no one knows what will happen. There may be some escalation in the energy markets, even if it doesn’t look like it – there is plenty of gas, new capacity is being built at LNG terminals across Western Europe. It doesn’t look like there will be a repeat of the gas shut-off problem that happened last year.

I think that a year ago, in my wildest dreams, I did not dare to predict such a high profit for 2022, because no one thought that electricity would cost up to 1000 euros per MWh, which is the price of August 26 of last year.

What results do you expect in the following period?

For the entire year 2023, we expect an EBITDA operating profit at the level of CZK 105 to 115 billion, and we expect net adjusted profit at the level of CZK 33 to 37 billion. That’s our best estimate that we’ve published. We’ve narrowed the range as we’re a few months into 2023 and we’re lowering our EBITDA expectations as energy prices have fallen and so has the manufacturing open position. At the level of net profit, we basically confirm the outlook from the beginning of the year. The results of the following years will depend mainly on the development of commodity market prices and energy regulation in Europe.

How much will you pay to the Czech state this year in new taxes on windfall profits?

The windfall tax and levies will cost us about 30 to 40 billion CZK for 2023.

How will the dividend and tax on extraordinary profits of ČEZ help reduce the state budget deficit?

The Czech state should receive more than 100 billion CZK from the ČEZ Group this year. This includes levies from excessive production sales above the defined ceilings of individual production sources, a tax on unexpected profits, a dividend in the amount of CZK 44 billion, as well as payments in the name of ordinary income tax – in particular, an additional payment of ordinary income tax on the profit of 2022 beyond the scope of advances, which is due at the end of June 2023.

Will ČEZ transfer as much to the state coffers in the following years?

That depends on electricity prices, but I don’t think so. This is the result of the extremely successful year 2022, which exceeded ordinary years several times with its profit. We also know what happened with energy prices, and I think we will be happy if such a situation does not happen again and energy prices are lower than last year in the long term. Therefore, CEZ’s profit will also be lower.

From last year’s profit, you proposed to pay a record dividend of CZK 117 per share. Will this happen again in the future?

We will pay it in August, and the amount will be decided by the shareholders at the general meeting on June 26. The highest dividend in history was in 2009, when it amounted to CZK 53 per share. Now it is 117 CZK, so it is enormous compared to previous years.

So should shareholders expect a smaller dividend in the future?

It’s usually like that. When there are less profits, there are also less dividends.

In the coming years, CEZ will have to invest in new resources. How do these investments go together with what you will pay to the state?

Our proposal reflects our financial capabilities, plans for the future and, of course, all applicable levies and taxes resulting from applicable legislation. With a relatively high nominal dividend, this is 80 percent of the achieved net profit adjusted for the year 2022. And this is an amount that we can afford to pay out and not jeopardize our plans and the implementation of the approved VISION 2030 strategy for the future.

Of course, if we have a large number of projects underway in the following years, we will probably propose a dividend not at the upper limit of the payout ratio, but possibly lower. The average payout ratio of energy workers in Europe is about 65 percent. We can now afford a higher dividend because we have no major investments in new sources, whether gas or renewable, for 2023 and the following years, and we have a relatively strong financial starting position. That’s why we can do it without jeopardizing our medium-term financial stability.