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

Good morning. Ladies and gentlemen, welcome to the press conference devoted to the Q3 2020 results. Welcome to journalists, analysts, and I invite you to asking questions with the help of the forum made available. Today's conference will be with the participation of Mr. Wojciech Dabrowski, the CEO of PGE; and Mr. Pawel Straczynski, the CFO. Good morning. Over to Mr. Wojciech Dabrowski, the CEO.

Ladies and gentlemen, in October this year, we presented a new PGE strategy. That's an effect of highly intense work that have been taking place since February. We can see that our analysis of the situation in the energy sector as well as the new plans have been positively evaluated by the experts in the market. The new PGE strategy is the first document developed by our company indicating a comprehensive path of the energy transformation. We set the goals -- ambitious goals, such as the reduction in CO2 emissions, renewable and low-emission energies, modernization of distribution grid and the offer for consumers. We will be investing in wind farms in the Baltic, and we will be appropriating PLN 75 billion. So we want Polish companies to benefit from this, and we want for Polish contractors to build their competencies. Ladies and gentlemen, a month has passed since the publication of the strategy. Over that time, we focused on communicating the assumptions to yourselves, shareholders, investments -- investors, financial institutions, employees and other stakeholders as well as residents. It's important for us to have all these stakeholders to obtain all the information regarding PGE's strategy and its further growth. It's very important for everyone to have uniform information on the group's growth. We also note and analyze only remarks regarding the assumptions. We realized that the new strategy will have a direct impact on our employees and the residents of the regions that will take part in the energy transformation. It's important for us that employees have ongoing access to information. We have launched a platform for asking questions, and unfortunately, it's online like with you that we have to hold our meetings because we have to observe the sanitary regime. We've had meetings with PGE Distribution as well as the head office of PGE, let's say. The next meeting will be held shortly. I'd like to take this opportunity for asking the employees for a very numerous turnout. The regional transformation of the first press release in February this year, I said that PGE will be going green while respecting the conventional base. Today, in the first meeting, you're still online after the announcement of the new PGE strategy, and that's the last results conference devoted to results. I'd like to come back to this because side by side, we had work going on on the regional transformation, and we decided that the social issues were among the key issues to success. I'd like to emphasize that the transformation will be in cooperation with residents and employees, and the role of PGE will not be limited to transferring coal-based assets to another companies. We'll also be supporting the residents in terms of sports, culture, education as well equal qualification of employees covering them with secondment and mentorship programs. We would like for them [ to be covered ] by residents, entrepreneurs, local organizations, teachers and opinion leaders. PGE will be part of training children and youth in future jobs. The balance transformation will be held in a relay formula, and we'll be trying to obtain information -- the funding for the social program. PGE is definitely not leaving the regions without specific solutions. We are in ongoing contact with the Ministry of State Assets and the plenipotentiary of the government for the transformation of energy within companies and mining. Polish energy was built based on the conventional basis. However, changes cannot be avoided. If we want to be independent in energy terms and generate Polish energy, we want -- we must invest in renewable energies but on our own conditions in a realistic time perspective without transferring the cost to the society and without any severances. That's why we want to also offer energy at competitive prices. I'm convinced that transformation with smart proposals and the involvement of central and local authorities as well as the residents will prove successful and a good example set to others in seeking solutions for Polish regions. We analyze energy transformation processes in Western Europe. We will be wanting to take advantage of good solutions and avoid those decisions that have fallen through. What is the plan for Belchatow? The PGE Board has launched a project of fair transformation of the Belchatow compound. By the end of 2020, we want to run investment committees in such a way that we can take advantage of EU funding and be carried out as part of project [ finance ]. The estimated CapEx already amounts to PLN 2.5 billion. The CapEx plan covers 3 most important initiatives: that's waste-to-energy unit that can process 180,000 tonnes of municipal waste; and also photovoltaic farms in the post mining regions around Belchatow; the onshore wind farms with the power of roughly 100 megawatts. This is what we will be communicating to our stakeholders. Also nuclear energy comes into play. We announced that Belchatow might be a site for one of nuclear power plants. Ladies and gentlemen, we're working in an extraordinary situation. We're struggling with the coronavirus pandemic. I'd like to tell you that on operating terms, we are -- our group has been working without any perceptible changes delivering energies and heat. Our employees have personal protection equipment insured since the beginning of the pandemic. The group has spent over PLN 12 million to that end. As of today, we have 1.5% of infected people and 1.8% of quarantined individuals. It stems from our data since the beginning of the pandemic roughly 3% of our staff have been infected, and roughly 5% of the staff have been quarantined. Owing to the restrictions implemented and the procedures, the percentage of sick people is completely under our control. All the units are prepared for any scenarios. We're also covering the scenario of -- in terms of over standard absenteeism. We're also supporting the government by involving volunteers in the sanitary -- Chief Sanitary Inspectorate helpline, also connected with a test -- coronavirus tests. In terms of CapEx, the new strategy has raised the bar in terms of investments. Our investment plans are even more ambitious. PGE CapEx will be the driving force of Poland's economy and will help many Polish entrepreneurs to overcome the crisis. Our CapEx program will be focused on low- and zero-emission resources. Over the decade, they will represent 85% of the generation resources [ only to new ] investments. We will avoid emissions of over 120 million tonnes of CO2. In pursuing that strategy, PGE will not only contribute to minimizing the energy impact on the environment but also the transformation of the energy mix. The Polish companies will benefit from this. It's very important, and that's why we also want to [ cycle ] meetings for an offshore in the program. We're also -- we have huge ambitions in terms of offshore farms. Before announcing our strategies, we announced the 3.2 gigawatts as part of Baltica 1, 2 and 3. And today, it is our ambition to plan -- to build 6.5 gigawatts, while the Polish government wants to invest in 8 to 11 gigawatts in the Baltic. So we want a major part of them to belong to PGE. We also have larger aspirations in the photovoltaics. By 2030, we'll have 3 gigawatts of power based on solar energy. As of today, PGE has ensured 200 hectares of land where we will be able to build solar farms with the power of 1,250 megawatts. This is just the beginning. Next year, we'll have more installations installed, and [ 2 other ] will soon be commissioned in a matter of days. Next year and in the next years, we mean to launch even more such projects. As I mentioned, a lot of them are small installations which will prevail in this year's auction. That's renewable energies up to 1 megawatt hours. We're also working on a major projects with hours of even over 100 megawatts, expecting relaxing of the regulations. In onshore resources, we hope to increase our onshore resources by 2030 to 1.2 gigawatts. We're also involved in potential acquisitions at various stages, stages of progress, and part of them are farms with power of roughly 100 megawatts and projects with a total power of several hundred megawatts whose progress allows us to commission them within the next 2 years. On the new strategy, we also announced a unique energy storage program. In a prospect over a decade, PGE will have a storage facility with a total power of at least 800 megawatts. We will soon be launching such an energy storage facility. We will be informing you about them. With due anticipation of the COVID, we are postponing the official opening of the storage. However, it will happen in a matter of days. So ladies and gentlemen, I'd like to confirm again that the plan announced is a realistic plan, which will build the group's power going forward and also ensure Poland's energy in safety for the next 30 years until conventional energy will be replaced by nuclear energy at the base. And I'd like to ensure all the stakeholders at the same time because there have been many doubts that the transformation program does not involve any severance. I'd like to emphasize this and reiterate that all the regions where we are working that will be affected by the transformation will not be left to themselves. Thank you very much.

Thank you, Mr. President. May I ask the CFO, Mr. Pawel Straczynski, to please take the floor.

Ladies and gentlemen, as each quarter, I will be presenting to you the most important information, facts and figures on the financial situation of PGE Group in Q3 2020. The situation in the energy market looks better than in Q2. We have visible effects of the economy unfreezing. Well, we have some sources of showing that imports have grown. The consumption is 1.2 terawatt hours. Last is the generation with 1.4 terawatt hours. The difference of 0.9 terawatt hours means the increase of net imports. And in September, we had the visible effect of economy rebound with consumption growing by 0.3% and the generation dropping by also 0.3%. We hope that in Q4, the pandemic situation will not aggregate, and we will not have to deal with a lockdown. And step by step, the generation and consumption curves will be growing. As regards the situation in terms of the crisis, we have to deal with a decrease in the wholesale market and, at the same time, an increase in CO2 emission prices. So our simplified CDS, let me emphasize it, let me repeat it, that's the difference between the quoted energy price and the quoted CO2 emission, right? Let me also emphasize that the production of 1 megawatt hours has to amortize close to -- in terms of the CO2. So our CDS is decreasing with hedging transactions for 2021. We're talking about a significant difference, where in 2020, the CDS hedged -- in 2018 was of PLN 130, PLN 140. Right now the CDS for 2021 already amounts between PLN 100 and PLN 110, which is a significant decrease in the margin of even PLN 30 per megawatt hour. Luckily, the situation is getting clearer in terms of the energy market in 2021. We had significant concerns as regarded the announcement to the European Commission for the Polish energy market. We think the situation is now better because of the energy market in the first half of the year. And hopefully, throughout the year, it will not be frozen [ larger ] than that. The transfers and recognition will be done on an ongoing basis, which would mean that the decrease in the margin caused by the dwindling CDS will be not fully but largely compensated by the recognized revenues and cash flows from the market, which will mean that the margins and conventional -- first of all, conventional energy segment will not be significantly worse because we are expecting slightly lower results of the segment than in 2020. However, they will not be much worse. The generation of net result in the group is roughly 0.4 terawatt hours higher than in the previous year. And as each quarter, I mentioned that this is caused by the commissioning of new units in Opole because there we had generation higher by 0.4 terawatt hours. The volume of distributed electricity is at the same level of roughly 9 terawatt hours. The sales to end users are lower by 0.6 terawatt hours. And as I said, there is a similar situation as in the previous quarters is in the [ CMR ] tariff groups. We have 0.1 terawatt hour higher. Sales in tariff G and tariff A and B, we have decreases by 0.1 terawatt hours. The heat sales are lower by 0.1 petajoules as compared to Q3 2019. The generation volume by fuel in Q3 with still lignite and hard coal predominant, lignite, 7.7 terawatt hours; hard coal, 4.8 terawatt hours. That's a comparable structure -- sorry, it was 4.7 terawatt hours. It's comparable to 2019. The increase of renewable energies has grown from 2.7% to 2.9%. In terms of gas, it also increased from 0.86 terawatt hours to 1.23 terawatt hours. Owing to this, emissions was also reduced from 0.86 to 0.85 tonnes of CO2 per megawatt hours, and that has a realistic financial effect, which would roughly translate into PLN 80 million of avoided costs in terms of CO2 emissions as compared to the previous year. A brief summary of the Q3 financials. We have to deal with the decrease of recurring EBITDA as compared to Q3 2019. It grew by PLN 60 million. The EBIT was lower by PLN 152 million and the net profit by PLN 167 million. At the same time, we reduced the indebtedness from PLN 11.4 billion to PLN 8.5 billion as compared to in the first semester. The net debt was reduced by PLN 1.17 billion. We have to remember that in next April, we will have to finalize the forward contract for CO2 emissions. I'll be talking about this shortly. The main -- major EBITDA value drivers in Q3 is a positive impact of PLN 417 million in terms of electricity wholesale of generation segments, but at the same time, a lowering of EBITDA connected with, first of all, of CO2 emissions and lower level of free allowances, that's PLN 744 million. Personnel costs and fuel costs, that's PLN 25 million and PLN 12 million, respectively. A positive group margin, PLN 183 million. That's owing to the correction of compensations for 2019. Ancillary services, that's mostly ORM in Opole and Rybnik power plants, PLN 49 million; a better result on the distribution of PLN 50 million. This way, we're reaching recurring EBITDA at the level of PLN 1,574 million. CapEx after 8 months on a cash basis as compared to the 9 months of 2019 decreased by PLN 300 million. The decrease was in the Conventional Generation where we had -- the CapEx was lower by PLN 550 million; at the same time, PLN 394 million, where the CapEx on low-emission sources. To be exact, these are low-emission gas units in Dolna Odra. In District Heating, CapEx was lower by PLN 133 million. In Renewables, higher by -- in Distribution, lower by PLN 86 million; and Supply and others have a rough -- a small impact of roughly PLN 20 million. The prospects for reported EBITDA outlook for 2021. Since we're in the latter half of November, we can already present our prospects, the way we see the outlook for 2021. I mentioned the Conventional Generation, we are consistently expecting a decrease in the reported EBITDA there, mostly going to the regions mentioned already, the dwindling CDS and a partial compensation from the energy market. And the prospects in the remaining segments are positive. In District Heating, we expect an increase in EBITDA as compared to 2020, [ although ] there's going to be an adverse impact of the CO2 emissions and the reduced free allowances, but at the same time, the additional revenues from the capacity market will be compensating for this as well as the tariffs. In terms of Renewables, we have positive outlook. We are expecting an increase in the EBITDA, first of all, owing to the increasing nominal energy price and with the full commissioning of wind farms built or acquired in 2020, I mean the cluster project and the Skoczyklody farm. So for the revenues for pumped-storage plants of the PSE will be compensated with the current revenues from the contracts of TSO. In terms of Supply, we're also expecting an increase in the EBITDA. We expect that the COVID situation in 2021 will be better than in 2020, and we'll have to deal with an increase in the energy consumption and also an increase in sales [ involved ]. And we expect that tariff G, which has to be approved by the President of ERO, will be covering the justified operating costs incurred by us because, today, it is not covered today. Tariff G, and I'll be also talking about the situation, what the situation looks in the Supply company. The situation is adverse. PGE Obrot has negative financial results, negative EBITDA. It requires being provided the loans by the mother company for its own ongoing business. And in Distribution, we also expect higher results. We have -- the WACC is lower by 30 bps, which will be roughly of the -- lower by 2.2 -- by 5.2%, but it will be compensating by the Regulatory Asset Base, which will be growing in 2020 and translate into 2021 by PLN 1.2 billion. We also expect in terms of the distribution tariff that major part of operating results that the distributors will be included in the tariff today. This is largely over 100%. We also have a major operating cost levels, which are not reflected in the tariff and are not recognized by the presence of the ERO as justified cost. The CapEx outlook for 2021. I'm sure that in 2021, the CapEx -- cash flows will be lower, which -- in Conventional Generation, which has to deal with the final stage of the construction of unit 7 at Turow power plant. We expect for this to be commissioned at the latest in April, then it will also improve the generation resources in Turow because it will be generating higher margin than the old units. In District Heating, we'll have to deal with an increase in expenditure related to the construction of new low-emission gas units, including Nowa Czechnica, also Bydgoszcz, Zgierz, CCPP and Kielce. Renewables, we have a consistent increase in CapEx as part of the PV development program. In terms of onshore programs, we have to [ deal with that today ]. As of today, the [ distance ] will not be [ relaxed ], so we are rather looking for potential acquisitions in the onshore segment. In terms of Supply and Distribution, we will be maintaining roughly the same CapEx level at the same level as in 2020. We're preparing also a new major CapEx program for 2021 -- 2030 under a different funding model. And it has been going on, and so far, work is still going on. This, we're talking with the President of the ERO and talking to potential partners who would be interested in the new formula. So I hope that once we have -- we know the specifics, we will be sharing this information with you. And the last segment, low-emission sources. As I -- low-emission energies. As I mentioned, we are starting the building of new gas capacities in Dolna Odra power plant, so the prospects of CapEx are positive. That's where the resources will be [ sent ] for CapEx. Ladies and gentlemen, these have been the most important facts and figures that I wanted to present to you and the comment for 2020. Thank you very much. And as usual, we expect the questions.

Thank you very much. In that case, we can start the Q&A session. The first question is for Mr. Dabrowski. Not so long ago, the PGE head office launched a program of voluntary leaving, and right now, probably, there's a group severance program underway. Does it mean that the employees of next companies can also be expecting the severance? What sort of skills are we talking about?

Ladies and gentlemen, the program of voluntary leaving was carried out at PGE at the [ 3rd ] of October 2020, and it assumed the reduction in the headcount by roughly 20%, 660 employees. We're doing this in a consistent way. The decisions are made in terms of personnel policy are made by each company. That's -- as some of you has asked how the decisions will be made. Let me emphasize that each entity Board will be making such decisions on an autonomous basis. We, as the Board of PGE, as a major decision, that's important to ensure the presence of employees with the right skills and minimizing the generation and competence gap. This is what we're doing on an ongoing basis. Also, demographic trends will be impacting the employment level. At PGE, we'll be basically -- there'll be less of us, fewer of us. All the analyses indicate that. At the same time, automation, digitalization will go on, which means that the most mundane work will be performed by machines. Of course, the machine will never be able to replace a human. However, the most mundane work should be -- I mean we all want -- I'm not sure about the employees, but we want to replace -- for machines to replace the most mundane work. And the structure of our employees shows that 50% of our employees are in the 50-plus group, which means that they'll be leaving in a natural way. We're talking about natural leaving, natural evolutions of the employment. So that's what we have in our models. And that means by 2030, the headcount will drop by roughly 30%, and by 2050, even by 50%.

Next question, also to Mr. Dabrowski. In conjunction with the ambitious CapEx program mentioned in the strategy, do you mean to return to dividend payout?

Ladies and gentlemen, first of all, I'm addressing the shareholders because as I've been guessing this question is from them. We understand your interest. We understand our shareholders. And the most important goal is to build a strong enterprise that will ensure the return on the capital invested. We hope to return shortly to a dividend payout. Of course, it's the general meeting that will be making that decision. However, we, as the Board, we will have our recommendation. As we mentioned in our strategy, we wish to come back to the dividend payout strategy.

The next question, this time it's for Mr. Straczynski. Where did you get such a good result for the Supply segment? And can we expect a similar one in Q4?

Ladies and gentlemen, indeed, in the Supply segment, we had roughly PLN 300 million. However, we must not forget that the Supply segment is composed of 2 parts, that's wholesale and retail. That's the result of PGE Obrót, as I mentioned. In PGE Obrót, after 9 months, we had PLN 186 million of net-net losses. EBITDA was roughly PLN 8 million of this, and we must not forget that it also covered roughly PLN 170 million. These were one-offs connected with the previous years. That's additional compensation for 2019. We had the surplus of certificates amortized from the previous years. So these were one-off events that will not translate into the next quarters. However, in our view, as we look at the Supply segment, especially in PGE Obrót, it will all depend on the evolution of the pandemic situation.

The next question, also to Mr. Straczynski. We heard that PGE is applying for over 12% of the G tariff increase. Why should the energy for households be more expensive?

Ladies and gentlemen, that's what I mentioned yesterday that we would expect from our calculations. It stems that tariff G supply company should be increased by over 10%. It stems from the situation where the ERO -- President of the ERO does not fully recognize it real energy purchase costs today. What is included in the tariff are not realistic prices, real prices. Let's say that it's the benchmark price, which is -- which significantly diverges from the real prices at which PGE Obrót contracts its energy. This does not include realistic costs incurred by PGE Obrót company. And we must not forget also one more thing that the growth of the consumer market has also caused the emergence of encumbrances in PGE Obrót, not recognized by anyone. Roughly speaking, PGE Obrót takes a charge from consumers only for the energy delta, as we call it, whereas for the distribution company, it settles the entire energy flows. Those additional costs are not included anywhere in the tariff. That's why have to answer to your question in a serious way, whether PGE Obrót is supposed to be a company which is not profitable on an ongoing basis that we have to subsidize or should we depart from the tariff in directions. This is, by the way, one of the indications from the EU where the energy prices should be gone, and maybe we should depart from tariffs we are putting forward. We have an idea of social tariffs which function similarly as similar instruments, which means that our poorest consumers would be covered by the social tariffs, whereas the supply companies for -- supply companies, obviously, after the cost optimizations because it's not the case that there's no cost optimizations are going on, and that the company is trying to transfer all the costs incurred to the tariffs. It's for the supply companies to become profitable entities so they can start generating at least symbolic profits rather than what I mentioned before, having to deal with the situation where they incur permanent losses.

The question, what's the stage of transferring coal-based assets? And when is these prices supposed to be finalized? That's a question for Mr. Dabrowski.

Ladies and gentlemen, our concept of transforming the group, consistent among others, in transferring -- separating coal-based assets to a separate entity, 100% controlled by the state treasury and being the basis for the energy safety of the country. And meanwhile, we will be going towards green energies. This has been approved by the government. And you will know the Minister of state-owned assets is working on the ultimate shape of this idea for the transformation. It's like an owner of the entire process. We also put forward the proposal, and we would like for this separation to take place next year.

Next question, to Mr. Dabrowski also. The number of COVID infections is growing. There's been a lot of information in the media about the difficult situation in Belchatow. Will the coronavirus pose a threat to the power plant and the mine in the location?