AB KN Energies (KNE1L) Earnings Call Transcript & Summary

Dear, ladies and gentlemen, good morning, everyone, and welcome to quarterly webinar for Klaipedos nafta. Today, Nasdaq Vilnius is hosted by CEO of the company, Mr. Darius Silenskis; and CFO of the company, Mr. Jonas Lenkšas. Firstly, the heads of the company will comment Klaipedos nafta financial results for the 12 months of 2019. [Operator Instructions] So Mr. Silenskis, I invite you to start the presentation.

Good morning, everybody. So as usually, before the presenting financial results, we would like to briefly go through the main activities and to make short briefing about our main activities. So on Slide #4, which you can see in front of you right now, we have a mission, vision and value as presented to our investors. There is no changes on that. We still have our mission, which is insurance of reliable and effective supply of LNG and transshipment of oil products. And the company's values, which was identified 2 years ago, we are remaining the same. So I will move to another slide, to the next slide, Slide #5, where you can see our main activities. And in general, we can split them into 2 bigger groups. We are operator of oil -- both oil and LNG terminals. In terms of oil terminals, the biggest assets are located in Lithuania. We're operating marine terminal in Klaipeda seaport with overall capacity of about 600,000 cubes. And we also operate terminal -- inland terminal, which main purpose is storage of state reserve and [Technical Difficulty] to the commercial customers. LNG terminals, we have 2 terminals in Klaipeda, FSRU unit Independence, which is used to import LNG and regasify it and provide it to the local grid. And also we have -- we operate small-scale LNG terminal, which is capable to accept LNG smaller cargoes, load them into trucks, bunker ships and provide bunkering both to ships and both to -- by using trucks. So main highlights. I won't go through each highlight and I won't state it, but I will focus on 4 main messages which has happened during the last quarter. So starting from the oil business or oil segment, the main message was that we successfully prolonged our contract with BNK U.K., which is the Belarusian entity and which is main exporter of Belarusian oil products from Belarusian refineries. The contract has been renewed or prolonged for additional 2 years period. Talking about our LNG activities. So major event from this activity is related with corporate approvals, countersignature regarding the financing both of LNG supplement reduction and the acquisition of FSRU solution. In regards to our global LNG activities, we are continuing our negotiation with GNA company for operations and management services in GNA's LNG terminal in Porto do Açu in Brazil. In regards to our small-scale terminal, the key event which has happened during quarter 4 of 2019 was signature of long-term contract signature with Polish state-owned oil and gas company, PGNiG, where we have dedicated 100% of capacities of the small-scale terminal to this company, and commercial operations shall -- will commence starting from April 2020. In terms of financing, I already mentioned, corporate approvals for acquisition of FSRU also has been gained during that period. So from now, I will pass stage to Jonas, and he will go through briefly the financial results. Thank you.

Thank you, Darius, very much, and good morning, everyone. It's a pleasure to see you here, and I will start with main financial highlights of our results. And the year 2019 was marked by a change in IFRS 16 that has significant impact to our balance sheet and statement of comprehensive income. And as it was previously commented, but it's worth to repeat once more that the impact comes from the station that the company has FSRU lease denominated in foreign currency, namely U.S. dollars. And at the same time, the lease amount and term are relatively large and long. Therefore, fluctuations of euro, USD rate have material effect for statement of comprehensive income through the negative or positive result of a change in foreign currency exchange rate. And this impact is large because it is calculated from the lease amount, not only for 1 year, but also for all lease term, in our case. And in statement of comprehensive income, we have to record foreign currency impact coming from lease amounts also for 2021 and 2024 period. So -- on the other hand, the company doesn't realize any loss of income from such currency exchange rate deviation as according to methodology, the regulator for the company compensates actual costs, what means also the lease expenses at actual exchange rate. Therefore, company has an impact only from the amount of 1 year's lease, not from all periods. And in the next year, difference between planned and actual exchange rate is compensated. So due to this reason and for possibility to compare results with the previous periods and adjusted result and indicators are calculated and presented. And in adjusted result is the result where influence of IFRS 16 is eliminated. So going to main financial highlights. So we have turnover or sales revenues, which is by EUR 4 million higher than in previous year. Adjusted net profit is also higher than in previous year by EUR 1.6 million, so almost 6%. In terms of EBITDA, EBITDA is slightly lower than previous year. Speaking about the quarters, the last quarter of this year was better than in previous quarter. And also what we can see that the last quarter results, in terms of sales revenue and also in terms of adjusted net profit, is the best quarter since quarter 2 2018. In this slide, is provided the breakdown of impact of IFRS 16. And going from left side to the right, so first column is showing our adjusted net profit result, which is EUR 13.2 million. And the next column represents an impact of a change in foreign currency exchange rate which for 2019 amounted as a negative impact of EUR 6.1 million. The third column is showing an impact coming from IFRS 16 methodology together with influence result of deferred tax number. And in total, our impact of IFRS 16 for 2019 comprised a negative impact of EUR 5.1 million. Now going into the structure of sales revenues and EBITDA based on segments. So the structure of revenues and EBITDA by business lines are, in principle, the same as usual. And much more revenues are generated by LNG terminals. But in terms of EBITDA, close to 2x more is generated by oil terminals. In terms of revenues, sales revenues from LNG terminals has increased, but due to unfavorable stations in the market, revenues of oil terminals have decreased. And efforts in business development direction has shown positive results. And in 2019, business development activity has earned significantly higher sales revenues than in 2018. Looking at the EBITDA part, we can see that main impact of IFRS 16 comes to LNG terminals segment. So the last picture on the left bottom -- right bottom corner, where we can see that EBITDA of EUR 48 million against the adjusted EBITDA of EUR 9.5 million. Now coming to the results of each business lines, I'm passing the word back to Darius.

So thank you, Jonas. I will go briefly through the results of each segment. So starting from our oil business segment at the slide. You can see that transhipment quantities in oil terminals has decreased by 14%. And the activity from oil business generated 7% less EBITDA compared with the same period in 2018, mainly due to the following reasons: decrease in transshipment quantities was caused by numbers of incidents at the closest factories -- refineries and company's main clients, which resulted lower production volumes and lower export volumes to receivable markets, as well ORLEN Lietuva which is one of the main customers continuing to divert oil products via railroad to neighboring markets. Also the affect, let's say -- less tonnes has been transshipped due to Druzhba pipeline accident, which happened in Q2 -- quarter 2 of 2019, and this also influenced significant decrease of oil products handling because the Belarusian refineries, and we was just minimizing -- temporary was minimizing refining capacities. And also additional revenues has been generated from other activities such as storage of oil products, crude oil, loading and discharge of the trucks. And you can see that despite of a fact that 14% less tonnes, still, let's say, allowed us to generate only 7% less EBITDA comparing with 2018. I will move to the next slide, so LNG terminals. So shortly saying, we had a record year, 2019. The increased regasification was -- amounted 119%, almost 120%. And in 2019, we have regasified and provided to the grid 19.6 terawatt hours of natural gas. In terms of revenues, we have generated EUR 71.1 million from LNG terminals activity, which is about EUR 7 million more comparing to 2018. And talking about business factors, favorable -- the main reasons was that the pricing on the global LNG markets was favorable. And also during year 2019, we have managed to attract 3 new commercial use of FSRU, which has resulted in the increase of regasification and reloading volumes. Some statistics. So during 2019, we have managed to perform over 60 ship-to-ship operations. And actually, this number is more than during the entire period of terminal activity from 2014 to 2018. From this number, 51 LNG carriers, for example, in 2018, there was only 10 LNG carriers. So 2019 also was a record in terms of import of LNG. I already mentioned, it amounted 19.6 terawatt hours. It makes about 2 billions of cubic meters of natural gas, while in year 2018, we had 8.8 terawatt hours. And one more important message to pass is that about 6 terawatt hours, which is about 600 million cubic meters of natural gas, were transported towards Latvian border. So we was -- let's say, this volume is a transit volume. And also, it's worth to mention that about 94,500 megawatt hours of LNG was reloaded to small-scale LNG carriers. And this is also more comparing to 2018 when we had 64,000 megawatt hours. I also would like to underline that those operations are unique. We was first who started transshipment back to the smaller FSRU carriers and feed [Technical Difficulty]. During -- also, it's worth to mention about the LNG small-scale terminal. So we have -- we had 11 LNG carriers discharge at [indiscernible] and comparing to 2018, we had only 5 of them. So I will passing back stage to Jonas.

Thank you, Darius. So I will proceed with the next financial information. And in this slide, we present main financial figures and indicators. And due to earlier explained reason of IFRS 16 influence, we are providing here also a column with numbers and indicators in adjusted values. And as suggested, net profit was higher than in 2018. So all ratios, except of EBITDA, are better than in previous year. Speaking about the balance sheet, we see a major change between 2019 and 2018. And the main reason is IFRS 16 influence. We can see that the total balance amount increased by EUR 236 million. And by the same amount we see right-of-use assets. And cash and cash equivalents have decreased as part of the cash is transferred now to the bank. Deposits and other current asset group has increased, respectively. On the liability side, the reason of increase of total balance is the same IFRS 16 issue. And main difference from 2018 is appearance of lease liability that comprised EUR 242 million and lease liabilities higher than right-of-use assets value, and it is an outcome of influence of a change in foreign currency exchange rate. Liabilities are reassessed according to exchange rate in foreign currency at the reporting date, while assets remain at initial value. Financial liabilities has decreased as current loans are being repaid. And equity is lower than in previous year, as in 2019, all profit of 2018 has been paid in dividends and also a portion of own shares has been purchased with the aim to pay out to employees as part of the bonuses. So to summarize, the structure of the balance sheet, in general, has not changed a lot, if speaking from the previous quarter. And now going to investment overview. I will also give the word to Darius.

Thank you, Jonas. So talking about the investment program of the company. During 2019, we had invested EUR 22 million. Majority of the investments were into second phase Klaipeda oil terminal investment program. We also had some investments on LNG terminal and minor investments mainly into safety improvement in our Subaciaus oil terminal where we store state compulsory reserve. So I believe that's all from our side, and we are ready to go through the questions.

[Operator Instructions] The first one is the following. Klaipedos nafta has stated that it is able to handle up to 3 million tonnes of crude oil per year. Could you elaborate to which extent would it then affect oil product handling capacity? Which storage tanks are being used for crude oil? And how less oil products can be handled while having 3 million tonnes of crude oil in Klaipeda?

Thank you for the question. So I'll make a general remark and maybe explanation on the capacities and on technological specifics of our Klaipeda oil terminal, which is actually quite unique. And it's fully capable to transship from any means of transport to any means of transport, all refined products. I'm not talking about all petrochemical, let's say, list, but all liquid refined products. Petroleum products, dark products, light products, heated, non-heated. And the infrastructure of a Klaipeda oil terminal allows us to switch part of our capacities from one grade or even type of the products to another. If we are talking about capacities of Klaipeda oil terminal. So before the completion of the investment program, let's say, our capacities was 7 million metric tons of petroleum products transshipped through this infrastructure. But this limitation was mainly -- this limitation mainly comes from the restrictions of maximum capacities of railway trestles -- discharge railway trestles. If we are talking about the imports, the different, let's say, capacities and capabilities of the terminal exists. So about 3 million tonnes can be easily handled without effect of, let's say, outbound flow or exported volumes. Moreover, it's worth to mention that during 2019, we have added an addition 120,000 cubic meters of terminal capacities and which actually empowers us and allows us to provide service for alternative feedstock imports for our customers without affecting the regular export flows of refined products. So I believe I have answered to the question. Thank you.

Second question received in advance was the following: What is the current piece of work regarding oil terminal expansion? When the modernization program may be finished? And do you consider further rise of expenses? The budget for second stage of oil terminal expansion has been already extended in the end of November. What was the reason for that?

Very good question. Thank you. So I maybe will start from our, let's say, schedule of the second phase investment program, and it is planned to be completed Q4 of 2021. At that time, we should have additional railway trestle which will be connecting newbuild storage tanks and new capacities. Talking about November, and there was a key event published at NASDAQ. Actually was not related with increase of the budget or extension of implementation period of the second phase. It was just technical, how to say, merge of 2 different subphases into one. But due to the scope, we needed corporate approval. So that's why we went to the Board and published that to the market. But this is not related with increase of the budget or extension in timing. So it was also part of a question -- we considering further rise of expenses. So looking from today's perspective, no, we are within the budget, and we are on time according to the schedule and milestones set at the beginning of the second phase. Thank you.

Some more questions received in advance. Does Klaipedos nafta has -- have any plans to develop its business activity in other Baltic Sea LNG terminals?

Thank you for the question. As I shortly mentioned, one of our activities, in addition to operation of LNG and oil terminals, we are also engaged into development of international global LNG projects without, let's say, restricting ourselves on any region. As it was published before, we have experience in consulting services in South Americas. We also did some projects -- participated in some projects in Mediterranean. And one of the key events published during Q4 was related with Brazil in LNG projects. So Baltic Sea LNG terminals are not exclusion, and they are also, let's say, potentiality for our global LNG project development team. Thank you.

Also, where can we find statistics related to power utilization rate of LNG truck reloading station?

Thank you for the question. There is no such statistics, and it's related also with the confidentiality obligations, which is coming from the agreements with our customers. But in general, during the presentation of unaudited 2019 results, we showed that in terms of deliveries into small-scale LNG terminal, we had deliveries, which is by 6 deliveries more, 6 cargoes more comparing to 2018. But it's worth to underline what has been also mentioned before that from April, we are starting commercial operations together with one of the biggest players in the region, that's PGNiG, and we expect that this will boost, let's say, our small-scale LNG or LNG truck reloading capacities. Thank you.

The last one I received in advance is in open sources, it's possible to find information about other company, SGD terminalas, where Mindaugas Jusius is positioned as Head of Company. Does it mean that Klaipedos nafta is going to separate oil and LNG terminals? If yes, what will happen with FSRU and fixed asset related to oil and LNG? What will happen with leasing agreement of FSRU?

Thank you for the question. I believe this, let's say, question includes some outdated information because Mr. Mindaugas Jusius is not working in our -- any group of -- any company -- group of companies of Klaipedos nafta, so -- from end of July. And answering into your question, are we going to separate assets related to oil and LNG? No, we don't have such plan. We don't have any more such plans. Thank you.

Okay. What has been the capacity utilization percentage of Klaipeda LNG terminal over full year 2019?

Thank you for the question. The utilization rate of such infrastructure is, let's say, tricky question to answer because it relates to many factors. But if to talk about the theoretical capacities of FSRU Independence, so we are 4 billion cubic meters per year. And this is the perfect case scenario where the regasification, let's say, transits and all the other circumstances goes well. But if to, let's say, refer to theoretical capacity. So last year, we have utilized FSRU Independence by 50%. Thank you.

Okay. Does the company hedge foreign exchange rate risk?

Thank you for the question. It's Jonas, I will answer it. So at the moment, the company is not hedging foreign currency rate risk, but we're already working on that for this year. And we believe that we should have it in the future.

One more. What is the regulated WACC of LNG operations for this year set by the regulator?

Yes. So WACC for this year is 2.9%. So short answer.

Yes. Next, please. As regulated LNG operations generated more revenues in 2019, the max limit set by the regulator at 66.6 million. Does it mean that LNG tariff fixed component will be further reduced this year and Klaipedos nafta will earn even less than the new limit of EUR 36.6 million for this year?

Yes. Thank you for the question. And it's true that in 2019, the company has received more revenues than it was set by the regulator. And yes, it's correct that in future periods, this received bigger amount of revenues have to be returned back to the market. So what regards this year, it will not change, but for the year 2021, this higher revenue of 2019 will be reduced in the year of 2021, the revenues of the company, but this will not change the revenues of current year.

[Operator Instructions] Do you expect any export from Belarus in coming months or their refineries are working at low capacity to cover only domestic needs?

Thank you for the question. Yes, we do, because we have agreements with our Belarusian counterparties where the take-or-pay volumes are refined. Due to confidentiality, I cannot name it. But despite of fact that refineries are operating in some reduced capacities of crude, we are continuing export of refined products, including Klaipeda direction. Thank you.

One more, please. Approximately how much does Klaipedos nafta plan to invest in the global LNG project activities during the coming 3 years?

Thank you for the question. So as I have already mentioned, we have a dedicated team which main task is to look for potential projects worldwide, which fits into our, let's say, risk portfolio and which meets our return ratios, let's say, defined, let's say, limits or ranges. To say precisely, we don't have such a precise aim or goal for oncoming 3 years. But in case if we will get profitable enough and suitable project, we will definitely think about investment into it. Thank you.

Currently, we are waiting for more questions. Please remind us what was the regulated WACC of LNG operations for 2019? And why such low WACC of only 2.9% for 2020?

Yes. Thank you for the questions. So the WACC was changed according to the methodology after 5 years period for the next 5 years period. And the main change was due to changes in the methodology formula. And -- that's the reason. And also, there was a question to remind what was the regulated WACC for 2019? So that WACC was 6.8%. And yes, it became very low for 2020, 2.9%.

There is one more question. I would like to ask again about SGD terminalas. In 2019, Lithuanian Finance Ministry agreed to develop SGD terminalas from KN, which was tried to block by Achema Group. It means that Ministry and KN decided to cancel developing SGD terminalas?

Question. So I will split this question into 2 probably blocks. So -- and we'll start with, let's say, Achema and potential block of the decision. So just to summarize, during Q4 of 2019, we have got all needed corporate approvals and decisions. And also, we have ensured financing, both of LNG supplement reduction and acquisition of FSRU. Simply saying the decision is to continue operation -- to acquire FSRU unit and to continue operations of FSRU -- I mean natural gas or LNG import to Lithuania by using our infrastructure. And coming back to the SGD terminalas. So I believe this -- one of our group companies is a bit confusing market participants. This company is one of, let's say, special purpose business vehicles, which has been created at the beginning. And the purpose of that, yes, there was maybe intentions to diversify and split activities, oil separately from the LNG. But due to -- after the evaluation of the situation, after the analysis of pros and cons, we are not -- we don't have any more plans to separate those activities with SGD terminalas, one of our companies -- daughter companies. It will be not used anymore for this business separation because it's not applicable anymore.

Next question. What cost EUR 0.5 million other income in quarter 4?

Yes. Thank you for the question. So this is caused by the situation that we had a decrease in amounts payable to our supplier according to an additional agreement between the companies.

So it seems all questions are answered. I think we can conclude. And the record of the presentation will be available as always in the Nasdaq Baltic YouTube channel webinar playlist and on the company's website, kn.lt. Dear guests, thank you very much for your presentation and for answers given. Participants, thank you for joining.