2018 AnnuAl RepoRt A R 2018 - 2 M I L L I O N Y E A R S -100,000 YEARS 0 cez gRoup SOLAR ENERGY HYDRAULIC ENERGY eneRgy histoRy fOSSIL ENERGY ELECTRICAL ENERGY STEAM ENERGY wIND ENERGY NUCLEAR ENERGY UNIqUE IDEAS AND NEw AppROACHES HAvE LED US ALONG A path TOwARD THE MOST EffICIENT ELECTRICITY generation pOSSIbLE, wITH RESpECT TO ENvironmental pROTECTION. CEZ GROUp’S pRESENCE REpRESENTS A SMALL bUT DISTINCT CHApTER IN THIS history. CEZ Group CEZ Group’s Profile CEZ GROUP’S PROFILE Headquartered in Czechia, CEZ Group is an integrated energy conglomerate with operations in Western, Central, and Southeastern European countries. Its core business is the generation, distribution, trade in, and sales of electricity and heat, trade in and sales of natural gas, and coal extraction. It also provides comprehensive energy services to its customers. CEZ Group companies employed more than 30,000 people at the end of 2018. The largest shareholder of the parent company ČEZ is the Czech Republic with a nearly 70% stake in the company’s stated capital. ČEZ shares are traded on the Prague and Warsaw stock exchanges and included in the PX and WIG-CEE exchange indices. CEZ Group’s mission is to provide safe, reliable, and positive energy to its customers and society at large. Its long-term vision is to bring innovations for resolving energy needs and to help improve the quality of life. CEZ Group’s strategy is to be among the best in the operation of conventional power facilities, offer a wide range of products and services addressing the energy needs of our customers, develop a portfolio of renewable energy sources, and proactively respond to the challenges of the 21st century. The energy sector is heading toward greater decentralization, renewables, as well as savings in the use of energies, which are areas where CEZ Group is actively seeking additional opportunities and new markets. CEZ Group focuses on modern technologies, which will continue to alter the shape of the energy sector and which it wants to play a major proactive role in. CEZ Group companies in Czechia extract and sell coal, generate and distribute electricity and heat, and trade in electricity, natural gas, and other commodities. They also offer customers technologies for electricity generation and storage and provide them with comprehensive energy services. Their generation portfolio consists of nuclear, coal-fired, gas-fired, hydroelectric, photovoltaic, wind, biomass, and biogas facilities. CEZ Group’s business activities abroad include primarily electricity distribution, generation, trading, and sales, as well as natural gas trading and sales, commodity trading in wholesale markets, and active presence in the development of energy services and renewables. Foreign countries where CEZ Group is doing business include, most importantly, Germany, France, Poland, Romania, Bulgaria, Hungary, Slovakia, and Turkey. CEZ Group’s business activities are governed by strict ethical standards that include responsible behavior toward employees, society, and the environment. In its business activities, CEZ Group embraces the principles of sustainable development, supports energy efficiency, promotes new technologies, and creates an environment for employees’ professional growth. Its corporate culture emphasizes safety, continuous growth in internal efficiency, and support for innovation in order to increase CEZ Group’s value. 2 CEZ Group CEZ Group’s Profile energetická aktiva CEZ Group Presence in the Energy Sector by Territory Berlin Warsaw Prague Bratislava Budapest Bucharest Sofia Ankara Generation Distribution and Sales Traditional electricity generation Electricity distribution Renewable electricity generation Heat distribution Heat generation Sales of electricity to end-use customers Sales of natural gas to end-use customers Sales of heat to end-use customers Sales of energy services elektřina zemní plyn teplo 3 výroba prodej koncovým výroba distribuce zákazníkům distribuce prodej koncovým prodej koncovým zákazníkům zákazníkům CEZ Group Table of Contents Table of Contents 006 Statutory Declaration by Persons Responsible for the CEZ Group 2018 Annual Report 007 Information on the Independent Auditor’s Reports 010 Introduction by the Chairman of the Board of Directors of ČEZ, a. s. 013 Selected Indicators of CEZ Group 014 Shares 016 Selected Events 018 Developments in Relevant Energy Markets 022 External Conditions in the Energy Sector 027 CEZ Group Strategic Objectives 028 CEZ Group Risk Management 031 Approach to Risks in Relation to Financial Reporting 032 Summary Report pursuant to Sec. 118(9) of the Capital Market Undertakings Act 036 Governing Bodies of ČEZ, a. s. 058 Persons with Executive Authority 060 Supplementary Information on Persons with Executive Authority at ČEZ, a. s. 062 Concern Management 063 Corporate Governance Compliance 068 Report on Operations 068 CEZ Group Financial Performance 080 CEZ Group Capital Expenditures 081 CEZ Group Commodity Procurement, Sales, and Generation 084 Financial Performance of ČEZ, a. s. 090 Operations Team 090 Safety Management at the Operations Team 094 Czechia 104 Poland 107 Other Countries 110 Development Team 110 Safety Management at the Development Team 111 Czechia 118 Germany 120 Poland 122 France 124 Romania 126 Bulgaria 128 Other Countries 134 Research, Development, and Innovation 141 CEZ Group Donorship 143 Human Resources 148 Environmental Protection 153 Changes in CEZ Group Ownership Interests 156 Legal and Other Proceedings Involving CEZ Group Companies 4 CEZ Group Table of Contents 166 Basic Organization Chart of ČEZ, a. s., as at March 18, 2019 168 Information for Shareholders and Investors 172 Methods Used to Calculate Indicators Unspecified in IFRS 174 Supplementary Information on CEZ Group Members according to IFRS 182 Report on Relations between the Controlling Entity and the Controlled Entity and between the Controlled Entity and Entities Controlled by the Same Controlling Entity for the Accounting Period of January 1, 2018, to December 31, 2018 222 Consolidated Financial Statements of CEZ Group in Accordance with IFRS as at December 31, 2018 294 Explanatory Note for Users of the Consolidated Financial Statements 295 Independent Auditor’s Report 302 Financial Statements of ČEZ, a. s., in Accordance with IFRS as at December 31, 2018 356 Explanatory Note for Users of the Financial Statements 357 Independent Auditor’s Report 364 Identification of ČEZ, a. s. 000 Annex 1 Relation Structure Diagram for the Period of January 1, 2018, to December 31, 2018, for the Report on Relations between the Controlling Entity and the Controlled Entity and between the Controlled Entity and Entities Controlled by the Same Controlling Entity for the Accounting Period of January 1, 2018, to December 31, 2018 (under back cover flap) In most chapters of the Annual Report, company names are given without the abbreviation specifying their legal form. The full names of CEZ Group companies are listed in the Related Parties Report included in this Annual Report (see p. 182–219). The full names of companies outside CEZ Group are provided under Information for Shareholders and Investors (see p. 170–171). 5 CEZ Group Statutory Declaration by Persons Responsible for the CEZ Group 2018 Annual Report StatUTORY DECLaratiON BY PERSONS RESPONSIBLE FOR THE CEZ GROUP 2018 ANNUAL REPOrt Statutory Declaration With the use of all reasonable care, to the best of our knowledge the consolidated Annual Report provides a true and fair view of the financial situation, business activities, and results of operations of the issuer and its consolidated group for the year 2018 and of the outlook for the future development of the financial situation, business activities, and results of operations of the issuer and its consolidated group, and no facts have been omitted that could change the meaning of this report. Prague, March 18, 2019 Daniel Beneš Martin Novák Chairman of the ČEZ Board of Directors Vice-Chairman of the ČEZ Board of Directors 6 CEZ Group Information on the Independent Auditor’s Reports INFOrmatiON ON THE INDEPENDENT AUDITOR’S REPOrts In connection with the audit of the consolidated and separate financial statements of ČEZ, the independent auditor acquainted themselves with information contained in the Annual Report and reviewed its consistency with the financial statements and other facts known to them. As required by the Czech Auditors Act, the independent auditor’s opinion on the 2018 Annual Report is not given in a separate report but included in the audit reports on the financial statements. The Independent Auditor’s Audit Report on the Consolidated Financial Statements can be found on page 295–301 and the Independent Auditor’s Audit Report on the Financial Statements of ČEZ can be found on page 357–363. 7 fiRe fLINTS USED TO STRIkE fIRE wERE fOUND NEAR THE REMAINS Of fIvE pEOpLE that LIvED IN MOROCCO 300,000 YEARS AGO. −297,983 THE CHINESE USED fIRE TO pRODUCE CHARCOAL that wAS THEIR SOURCE Of heat fOR STEEL smelting. –1000 fOR A LONG TIME, pEOpLE Obtained fIRE bY STRIkING pHOSpHORUS matches AGAINST ANY ROUGH, dry SURfACE. THEIR DISADvantage wAS THE pOSSIbILITY Of Spontaneous IGNITION. IN 1844, Gustaf ERIk Pasch Of SwEDEN patented THE USE Of RED pHOSpHORUS IN THE STRIkING SURfACE, eliminating THE NEED fOR wHITE pHOSpHORUS IN THE match AND OpENING THE way TO THE MANUfACTURE Of SAfETY matches. 1844 BURNING-HOT IDEAS ARE WHAT KEEPS PUSHING US ALL FORWARD. CANDLE fLAME TEMperature RANGES fROM 800 °C IN THE MIDDLE Of THE fLAME TO 1,400 °C at ITS pALE bLUE EDGE. wOOD bURNS at 700–1,100 °C AND Oxyacetylene wELDING GAS HAS A TEMperature Of 2,700–3,200 °C. 800–3,200 CEZ Group Introduction by the Chairman of the Board of Directors of ČEZ, a. s. 10 CEZ Group Introduction by the Chairman of the Board of Directors of ČEZ, a. s. INTRODUCTION BY THE CHAIRMAN OF THE BOARD OF DIRECTORS OF ČEZ, a. s. Dear shareholders, Another year has passed and I am pleased to observe that our We were also pleased that Institutional Investor journal assessed company’s worth has increased again in 2018.