F CEZ Group Annual Report 2017 Zero-Emission Energy Sources Biomass Lighting Residential Buildings Carsharing Smart Technologies Lighting Renewables Smart City E F With the use of new forms of energy sources and the increased efficiency of existing energy processes, the future is very bright. B CEZ Group 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 employ almost 30,000 people. The largest shareholder of its parent company, ČEZ, is Czechia with a nearly 70% stake in the Company’s stated capital (as at December 31, 2017). 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. Our vision is to bring innovations for resolving energy needs and to help improve the quality of life. CEZ Group’s strategy is based on three priorities: we are among the best in the operation of conventional power facilities and proactively respond to the challenges of the 21st century, we offer a wide range of products and services addressing our customers’ energy needs, and we reinforce CEZ Group’s position in Europe by investing in promising energy assets. The energy sector is heading towards greater decentralization and renewable energy sources, which are areas where CEZ Group is actively seeking additional opportunities and new markets. It focuses on modern technologies, which will continue to alter the shape of the energy sector and which CEZ Group 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 electricity generation and storage facilities and provide them with energy services, especially those related to savings. Their generation portfolio consists of nuclear, coal-fired, gas-fired, hydroelectric, photovoltaic, wind, and biogas facilities. CEZ Group’s business activities abroad concern primarily electricity distribution, generation, trading, and sales, as well as natural gas trading and sales, commodity trading in wholesale markets, and active presence in energy services and renewables. Foreign countries where CEZ Group is doing business include most importantly Germany, France, Poland, Romania, Bulgaria, Slovakia, and Turkey. Companies in the Netherlands are ownership intermediaries and companies providing financing to CEZ Group. 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. C 2 CEZ Group CEZ Group 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 3 elektřina zemní plyn teplo výroba prodej koncovým výroba distribuce zákazníkům distribuce prodej koncovým prodej koncovým zákazníkům zákazníkům CEZ Group Table of Contents T Table of Contents Statutory Declaration by Persons Responsible for the CEZ Group Annual Report 6 Information on the Independent Auditor’s Reports 7 Introduction by the Chairman of the Board of Directors of ČEZ, a. s. 8 Selected Indicators of CEZ Group 11 Shares 14 Selected Events 18 Developments in Relevant Energy Markets 20 Governing Bodies of ČEZ, a. s. 24 Persons with Executive Authority at ČEZ, a. s. 46 Supplementary Information on Persons with Executive Authority at ČEZ, a. s. 48 Concern Management 52 Compliance with WSE Corporate Governance Code 53 Approach to Risks in Relation to Financial Reporting 55 Summary Report Pursuant to Section 118(9) of the Capital Market Undertakings Act, on Certain Aspects of the Equity of ČEZ, a. s. 56 CEZ Group Strategic Objectives 59 Report on Operations 64 CEZ Group Financial Performance 64 CEZ Group Capital Expenditures 73 Commodities Procured and Sold by CEZ Group 76 ČEZ, a. s. Financial Performance 78 Risk Management at CEZ Group 81 Safety Management at CEZ Group 86 CEZ Group in Czechia 89 CEZ Group in Germany 112 CEZ Group in France 115 CEZ Group in Poland 117 CEZ Group in Romania 121 CEZ Group in Bulgaria 124 CEZ Group in Turkey 128 CEZ Group in Other Countries 132 Innovation Projects 136 Research and Development 138 CEZ Group Donorship 144 Human Resources 146 Environmental Protection 149 Changes in CEZ Group Ownership Interests 153 Litigation and Other Proceedings Involving CEZ Group Companies 158 4 CEZ Group Table of Contents Basic Organization Chart of ČEZ, a. s. as at March 19, 2018 168 Information for Shareholders and Investors 170 Methods Used to Calculate Indicators Unspecified in IFRS 174 Supplementary Information on CEZ Group Members 176 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, 2017, to December 31, 2017 182 Independent Auditor’s Report 214 Consolidated Financial Statements of CEZ Group in Accordance with IFRS as of December 31, 2017 Consolidated Balance Sheet 220 Consolidated Statement of Income 221 Consolidated Statement of Comprehensive Income 222 Consolidated Statement of Changes in Equity 222 Consolidated Statement of Cash Flows 223 Notes to Consolidated Financial Statements 224 Independent Auditor’s Report 290 Financial Statements of ČEZ, a. s. in Accordance with IFRS as of December 31, 2017 Balance Sheet 296 Statement of Income 297 Statement of Comprehensive Income 298 Statement of Changes in Equity 298 Statement of Cash Flows 299 Notes to the Financial Statements 300 Identification of ČEZ, a. s. 348 5 Statutory Declaration by Persons Responsible for the CEZ Group Annual Report Statutory Declaration S 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 2017 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 19, 2018 Daniel Beneš Martin Novák Chairman of the Board of Directors, ČEZ, a. s. Vice-Chairman of the Board of Directors, ČEZ, a. s. 6 Information on the Independent Auditor’s Reports In connection with the audit of the consolidated and separate financial statements of ČEZ, a. s., 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 2017 Annual Report is not given in a separate report but included in the independent auditor’s reports on the financial statements. The Independent Auditor’s Report on the Consolidated Financial Statements can be found on page 214 and the Independent Auditor’s Report on the Separate Financial I Statements can be found on page 290. 7 Introduction by the Chairman of the Board of Directors of ČEZ, a. s. I Dear shareholders, The past year reminded all of us of just what turbulent times the energy sector is currently facing: rapid development of new technologies, legislative changes, debates on setting EU targets, the changing preferences and position of customers/consumers, and above all high volatility of wholesale electricity prices. The traditional energy sector, as we used to know it, has been experiencing a period of intense changes for several years now. I am happy that CEZ Group continued to have considerable success in meeting its financial and strategic goals in 2017. First, I would like to briefly comment on our financial results. We exceeded our initial targets for EBITDA and net income by almost CZK 2 billion and managed to generate more net income than in 2016 despite lower electricity realization prices. This was greatly aided by our successful sale of MOL shares and the concurrent redemption of convertible bonds. ČEZ delivered a return on the long-term investment for its shareholders in this transaction, as the total positive cash-flow balance for CEZ Group from 2007 to 2017 was CZK 3.4 billion and the contribution to 2017 net income totaled CZK 4.5 billion. Exceeding the initial financial targets for 2017 was also helped by the Temelín Nuclear Power Plant’s record-breaking availability; its generation of 16.48 TWh beat the previous record from 2012 by 1.18 TWh. CEZ Group’s trading teams also continued to be successful, as they managed to derive additional profits from the increased volatility and growing prices of electricity in wholesale markets in 2017. ČEZ’s market capitalization increased by CZK 35.6 billion, that is 15.5%, in the past year. Although we made a number of major strategic acquisitions in 2017, we remain one of Europe’s financially healthiest energy companies, as evidenced by ČEZ’s credit rating of A– with a stable outlook by Standard & Poor’s.