PGE Polska Grupa Energetyczna S.A. (PGE) Earnings Call Transcript & Summary

Good morning, ladies and gentlemen. We're starting our cyclical meeting devoted to the presentation of results. We're meeting online again. It is time to discuss the results for the first half of 2020. The conference is a joint event for journalists and analysts. A heartfelt welcome to you, ladies and gentlemen, and you're all invited to asking questions through the form made available to you. In today's conference, Mr. Wojciech Dabrowski, CEO of PGE Polska Grupa Energetyczna will take place as well -- will take part as well as Mr. Pawel Straczynski, the CFO. Over to Mr. Wojciech Dabrowski.

Ladies and gentlemen, thank you for your participation in the conference wrapping up the publication of our results for the first half of 2020. It's our third meeting this year and a third one in the online mode owing to safety measures. The Polish economy is facing 0-emission challenges, as we know perfectly changes have to involve many sectors such as fuel, chemical, transport or farming. However, it's in the energy sector where the largest transformation will take part. We, as PGE, will be playing a key role, and we will be leaders of 0 emissions. It's our aspiration to make sure that 100% of green energy for customers, will be offered to our customers by our group by 2050, as you will know, because we've been informing about this. Since we appointed to the Board, we've been working on a new strategy. We are approaching this in a responsible, positive way, many people are involved, and we're far from being flashy. And working on our strategy, we've been using market data from financial institutions, central statistical office and all the segments of the group's business. We've introduced those data into our proprietary models. Owing to this work, a comprehensive strategy is being developed, allowing a successful transformation of the group towards green energy, which will become the benchmark for a group. As we've informed you also, we've also tried to accumulate cash. Our debt has dropped by PLN 2 billion, which is a large success. As I've mentioned, we're trying to accumulate money for new investments. We're also implementing changes to the capital group, facing the changes planned by the Ministry of State Assets. And owing to this, the Board has established the Holding Council of PGE Group. The general agreement to be concluded by the Boards of PGE Group subsidiaries is already implementing mechanisms to address the changes in the regulations. In line with the first pillar of the projected energy policy, I'd like to allude here to the draft of the state's Energy Policy 2040, which assumes the just transformation, appropriation of the EU funding for the regions. We have started a plan of a Just Transition Plan for Belchatów Complex. This involves the transformation for mining regions, such as Belchatów and Turów. It does not need to mean problems for the local labor market. From the examinations concluded, it seems that green investments can even create more jobs. We're trying to approach it with full responsibility. I'd also like to address your -- the money you've invested in our stocks and draw attention to the fact that since our latest conference, i.e., in May, the quoting has grown by 90%. The stock prices grew by 90%. Thank you very much because we approach it as an expression of trust in our declarations and actions. In the vacation period, the market mood was a little bit lower. And now the price is a little bit lower. However, the market valuation is derivative of many factors that we don't always have a control over, but it is our role to show the reliable picture of the company's situation and actions taken to build the company's value.

Thank you very much, Mr. President, over to Mr. Pawel Straczynski, CFO.

Good morning, ladies and gentlemen. As each quarter, I will try to be brief and concise in presenting the most important facts and figures, regarding the activities and business of PGE in the first half of 2020. As usual, we will start with the overview of the market situation. In the first half of 2020, we've had to deal with the difficult situation owing to the economic lockdown and the drop of electricity consumption by over 8%. We're talking about absolute -- in absolute numbers, that's about 3.5 terawatt hours, while increasing the net imports by almost 1 terawatt hour. This has produced a very negative effect for us in terms of lowering generation, mostly in centrally disposed units by almost 12%. That's 4.4 terawatt hours of lower generation. In July, it dropped by 0.4 terawatt hours and the generation dropped by almost 1 terawatt hour. That's exactly 0.8. This situation in the energy sector was not favoring us, unfortunately, which we will be able to see by the segment results, in terms of mining and conventional energy. Actually, all those units are centrally planned. So our impact on the efficiency of using them is only slight. However, we have to incur full fixed costs, which when confronted with a lower generation and the sales of generated energy, from those units, unfortunately, translated into a loss in the profit because the total unit cost of per terawatt hour has unfortunately increased. As regards the price situation in terms of bank contracts, unfortunately, we are still struggling with lowering prices, PLN 266 in the second half versus PLN 233 in the first half of 2020. In combination with the growing CO2 emission, price are simplified CDS, abstracting from fuel prices is unfortunately dropping to roughly PLN 100, PLN 100-plus. In comparison to of 2019 -- the first half of 2019, the net generation dropped -- I'm sorry, when it comes to the generation without the new units in Opole because we have to take it into account as a factor which needs to be taken into account. In the first half of 2020, we had generation, which was lower. In terms of generation, it was a drop by 4.2. In terms of distribution, we had a lower -- and lower effect by 0.8. First of all, owing to the economic lockdown in terms of tariff A, the sales were similar; in tariff B, the volume dropped by 0.5 terawatt hour; in C+R, it was a large drop by over 1 terawatt hour; and in G, it's negligible. All in all, the sales to end users dropped by about 8% less than 2 terawatt hours. When it comes to heat sales, they were comparable to the first half of 2019, it dropped by 0.8 petajoules to 27.8. In comparing the generation volume by fuel, in the first half of 2012 (sic) [ 2019 ], over 17 terawatt hours were generated by lignite, this time, 14.7, that's a drop by 2.3 terawatt hour and as -- hours. And as I mentioned, the main factor was the lowering of the load and the decommissioning of unit #1 Belchatów in 2019. In the case of hard coal, we had an increase by 1.1 terawatt hour from 8.7 to 9.8. And in the case of the wind, we increased the generation by 1 -- by 0.1 terawatt hour. The emissions -- emission rate of the group dropped -- in the entire group dropped by to 2 -- 0.02 tons from 0.82 to 0.8. The most important, financial results. Recurring EBITDA after the elimination of a one-off event that was the admission of free -- CO2 emission rights. Despite this, the recurring EBITDA dropped to about PLN 182 million. And now in the case of EBIT, without the elimination, we have of a drop from PLN 2.4 billion to PLN 271 million, and we will tell you about this in just a moment. The net result, it dropped from PLN 1.7 billion to -- it dropped by PLN 2.4 billion to, unfortunately, negative results, PLN 637 million in the red. We'll also tell you about the factors. Whereas the net debt as compared to 2019 has been decreased by over PLN 2 billion. If we compare it on a quarter-to-quarter basis, the drop of net debt is even larger because it represents over PLN 4 billion, whereas in Q1 owing to the untypical situation that we had in the CO2 emission rights market, where the drop of the price to EUR 14, EUR 15 caused -- triggered the necessity of providing cash as security. But efficiently, we've been able to decrease the net debt in line with the declarations by PLN 2 billion. The main factors of building EBITDA in the first half of 2020, these are, obviously, the elimination of the one-off event, that's roughly PLN 1.1 billion. The effect on wholesale price of electricity increased by PLN 915 million, owing to the realized price, but also at the same time, the increase in the emission rights price caused for EBITDA to drop by PLN 1 billion. So the higher price effect adjusted by the emissions rights is unfortunately negative. The fuel cost, that's about PLN 9 million. Personnel costs have unfortunately increased by roughly 6%, PLN 152 million. But let me add that this is all the effect transferred from 2019. It results from the previously incurred obligations by the group companies. And this year, we had to deal with the execution of those obligations. The higher -- the group margin on the retail market, that's minus PLN 93 million. Property rights and ancillary services, that's PLN 100 -- PLN 100 million of impact, and other, PLN 104 million. The recurring EBITDA is at the level of PLN 3.117 billion. After the elimination of one-offs, these are reclamation provisions and their valuation plays a significant role in shaping the result after the elimination of that event, at the level of PLN 312 billion -- sorry, PLN 312 million. We have reported EBITDA of PLN 2.8 billion. CapEx has stayed at the level of 2019. We also have to remember about what has been transferred from 2019. We had many projects, the contracts for which were concluded in 2019, and they were launched in 2020. However, in 2 segments, there have been significant changes. The first one is Conventional Generation, where CapEx has dropped on a year-on-year basis by PLN 768, but they increased by PLN 600 -- PLN 617 million in Renewables. So we're trying to -- even in these difficult times, we're trying to implement the ideas by -- that we presented as we were being appointed, where we signaled we wanted to go green and increase the cash flows into Renewables. The prospects of reported EBITDA in 2020 are, unfortunately, negative, especially in Conventional Generation. In the District Heating segment likewise, the impact is significant. We expect a further impact of extra CO2 emission rights granted, the increase in the CO2 cost. In terms of Distribution, we also have negative expectations, unfortunately, mostly owing to COVID and the lowering of the distributed energy volumes, and we have neutral expectations in terms of Renewables. And here, I should even say that there might be, well, to be on the safe side, we might even say that, that might be even positive. But however, we prefer to keep our expectations as neutral in this segment. In terms of Supply, the prospects are unfortunately also negative. What impacts the lowering of the expected EBITDA in terms of supply is, of course, the lack of effect of price increases versus the growing cost of generation in tariff G, we cannot transfer it, and the growing number of prosumers and an issue of settling energy generated by prosumers, which is still not settled. And there's still no realistic idea about how to go about this. It's growing. And as the volume of prosumers grows, this problem will be growing rather than disappearing.

I think these are the most important items that characterized the first half of 2020 in the Polish Energy Group, PGE. Thank you very much for listening. And I think if you want to find out something more about this, we are ready for the Q&A session.

Thank you very much, Mr. President. Ladies and gentlemen, it's time for the Q&A session where we will focus on the items that have not been touched upon during the presentation. Question number one, that's to Mr. Wojciech Dabrowski. What's next -- what comes next in terms of separating asset-based assets to Nowy?

The concept that we have presented is very well-known to you. It has been commented in detail by analysts and commentators of the energy sector. That's the separation of asset -- of coal-based assets to a separate -- and we support this. This is the safest solution, both from the social and economic point of view. The concept presented by us has been submitted to the government. Right now, it's being discussed at the governmental level. It has been approved by -- on a preliminary basis. We're waiting for the final resolutions and political decisions. But in our opinion, this concept is the most sensible one to ensure energy safety for Poland to separate those assets to a separate company and allow us to obtain funds for growth for green investments mentioned by Mr. Straczynski. As we said, we would invest in Renewables. This is being pursued by us on a consistent basis. We hope the decisions will be made as soon as possible. As you will know, we are waiting for the reconstruction of the government. So I assume that after the stabilization of the reconstruction of the cabinet, work will start on finalizing that concept.

Thank you very much. Question number two that we received this time, it's to Mr. Straczynski. Whether the impairment write-downs in conventional energy include the assumptions presented relating to the updated Energy Policy of the state by 2040?

Ladies and gentlemen, in this rapidly changing environment and the rapid evolution of the energy policy, which the European Union has been announcing, we've been testing those assets on a regular basis, which have a higher -- which are characterized by higher emissions than 550 kilograms per megawatt hours. So first of all, our coal-based assets on the 8th of September, the Ministry of Climate published a summary of the updated document, the Energy Policy for Poland by 2040. As you will know, this document shows the directions in which the Polish energy policy should be heading. In order to transform that energy sector, we've gotten acquainted with a document. However, we're testing the assets on a slightly broader basis than just the draft of the country's energy policy. For the first half of 2020, we performed the tests based on price paths prepared by independent experts. The effect in the conventional energy, Conventional Generation was such that we made next impairment charges to tangibles of over PLN 500 million. We are still waiting for the publication of the final document, which is right now being consulted and discussed with a broad circle of recipients. We are also part of that debate. And I think that after the adoption of the document in its final form, the impact of those assumptions to be presented in the country's Energy Policy 2040 will be reflected in the next test to be performed. As I've mentioned, we perform those tests every 3 months. And all the new information will be included in those tests. As of today, I don't see -- we don't see any need to adjust the impairment test, we believe that the paths adopted -- and let me add that they are pretty much conservative, assuming a rapid reconstruction towards 0 emissions or low emissions generation, it seems to be the right direction. Our talks to our auditors have consolidated our assumptions and made us realize that these assumptions are by all means realistic. And I don't think there's any need as of today to change that approach.

Thank you. Next question, it's to Mr. Wojciech Dabrowski. How does cogeneration fit into the energy transformation?

As you all know, both District Heating and the energy sector are in a period of a deep transformation. Coal will not be our basic fuel in the future. We will be using gas fuel in District Heating in our subsidiary, PGE Energia Ciepla. We're involved in the project based on gas. That's in Siechnic, Bydgoszcz, Kielce and Zgierz. The new cogeneration plant, EC Czechnica in Siechnica will be a key investment for the Wroclaw metropolis. And in 2023, it will replace the coal-based cogeneration plant. The work is going as planned. In the -- and new locations are in the -- at the preparation stage. That's Gdynia, Gdansk, Kraków, [ Wroclaw ]. That's a major project of transition of -- from hard fuels to gas, and we will be pursuing it in the next years.

Thank you. Next question, also to Mr. Dabrowski. Orlen is announcing investments into hydrogen. And I believe this is the fuel of the future also in the energy sector. So what does PGE say about this?

A lot of companies and the media are talking about hydrogen. You can see that there is a lobbying and information campaign in terms of the solution. However, hydrogen is a very costly technology as of today. There are many years ahead of us to make that fuel universal and to take the cost down to an acceptable level. Right now, you don't see the end of this way. And the current status of the technological development means that commercial investment into generation based on hydrogen would not be feasible, the cost would have to be incurred by the recipients, and that would be impossible. It's important for us to minimize the excessive charges to our customers and the cost of the entire energy system. Of course, we are open to new technologies, and we're trying to make sure that our installations would be ready to co-firing of hydrogen. Such an installation is even being built in Dolna Odra. The turbines will be installed in such a way that those turbines could be used for firing gas with a significant admixture of hydrogen. So in pursuing our investments, we are contemplating this and thinking about the future. In terms of that, this technology might be used going forward. However, as I said, as of today, you don't see the end of that path when that fuel could be used on a universal basis. Because it, first of all, involves a lot of cost. And we're trying to control them.

Thank you very much. The next question also to Mr. Dabrowski. What's the status of the cells of PGE Paliwa -- PGE fuels?

Well, owing to the decision made by us half a year ago as we took the wheel at PGE and made the decision of going green and that we would be transforming PGE and the entire energy and power generation sector, we're the largest entity, and we mean to be pioneers and trend setters in terms of the generation transformation, hence, the decision to lower some business activities. First of all, we cut off the business activities which were not profitable from our point of view. You will remember that we made some decisions and took activities to lower the expenditure CapEx by PLN 1 billion. Such were wins which were not profitable. And the decision to sell PG Paliwa as part of this decision. We made the final decision in August. And the process of negotiations in those interested has been commenced. Right now, we're involved in the negotiations with some bidders, both from Poland and from the broader market, owing to the success of the of the negotiations. We're not revealing the details. We assume that the transaction should take place by the end of the calendar year. Of course, if it can be pursued, this decision of ours is also aligned to the expectations of the ministry, and it is meant to simplify the structure and the processes in our group.

Thank you. The next question from our forum, it's also to Mr. Dabrowski. How would you respond to the increasing of the climate goal of -- EU's climate goal, 55% by 2030?