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

Good morning, ladies and gentlemen, and welcome at our quarterly presentation, where we want to present our financial operational results for Q1 2021. We continue to meet online, but we know that we have quite a good turnout on the other side of the screen, so we are very pleased to have you here. We would like to welcome all the journalists and analysts. We are very happy that you made time for us today, and we encourage you to use the question form that is at the transmission streaming page. Today, we have with us Mr. Wojciech Dabrowski, the CEO of PGE Group; and Mr. Piotr Sudol, who's the CFO of PGE. My name is Malgorzata Babska, and I'm the spokesperson for PGE Group. I have a pleasure to moderate this conference. And let me turn the floor to Mr. Wojciech Dabrowski, the CEO of the group.

Good morning, ladies and gentlemen. Yet again, we need to meet online. However, the situation is as it is and hopefully, the next presentation could be delivered in a face-to-face setting. With a great satisfaction, we are sharing our performance numbers for Q1 2021, as they really prove that our efforts to improve efficiency of our operations have yield fruit. And we have also a better operational results that will be discussed by Piotr Sudol. Speaking of the strategic objectives, let me tell you that when we were focused on the offshore project, offshore wind farms is the most important CapEx project in our group. And having the well-negotiated contract with the Danish company, Orsted, we are ready to deploy the offshore wind farms for the total capacity at 2.5 gigawatts. The combination of expertise of Orsted and PGE is the foundation for the very important projects for the national economy. First electricity from Baltica 3 will be available in 2026 and the Baltica 2, it will be before 2030. By 2030, we are going to deliver additional offshore projects for 1 gigawatt, and there are other similar products in the pipeline. We are going to apply for new permits. We have very ambitious goals, and we continue to plan new offshore wind products in collaboration with [indiscernible] companies with whom we have the letter of intent. At this point, it is key for us to organize our operations in such a way that we can fully participate with the Polish companies. On the 18th of June, we are going to have online meeting, and we invite all the interested parties. On the 1st of June, we are going to start our information campaign to attract as many companies as possible. And end of March and April brought new decisions for offshore wind farms, the Minister of Climate and Environment signed a new regulation on the maximum electricity generation, and the price level is PLN 319.6 per megawatt hours. And we got the supportive decision from the Energy Regulatory Office for the first phase of the offshore wind farms and also with the coverage of a negative balance, so-called differential contract. And today, it is important for us that we will be part of the research efforts for offshore generation. In May, we signed letter of intent with scientific institutes in Gdansk, the Technical University of Gdansk, the Institute of Machine -- Flow Machines in Gdansk and a Danish Technical University and the University -- Marine University of [indiscernible] to have its offshore center. Since October 2020, when we announced our strategy, we actually intensified our actions due to the energy transition and keep you advised on the further development. So our focus is on the transition of [indiscernible] Turow. And even the decision of ECJ, we've heard quite a lot about Turow recently. And while addressing yourself, our investors and shareholders, I would like to inform you that the employees of the Turow complex and their families can be -- come as both the opened pit and the power plant in Turów will continue to operate. We have never entered the [indiscernible] scenario. The Turów Corporations have been legally based on the license, issued by the Ministry of Climate. Since 2015, we have been in dialogue with the Czech partners. We've done everything that is required by the Polish and European law to get necessary license. We also had a over the standard trans cross-border consultations with the Czech partners, and the protocol was signed. All the commitments were delivered. And then September, we are going to complete the construction of the infiltration screen that will protect the ground water, and it was a voluntary proposal. We committed to deliver it by 2023, and we are going to complete it in September 2021. In addition to that, it was agreed with the Czechs that there will be a [indiscernible] that would be actually protecting the Czech side from our just emissions. Let me just add to that, that for years, our group have invested millions of zlotys in environmental installations. And over the past 2 years, PGE invested over PLN 19 million to minimize the impact of Turów open mine for the environment. And let me draw your attention to the fact that in the proximity of Turów, there are 9 open lignite mines, including 5 in Czech Republic, 4 in Germany. And they are all in operation, their own business. Therefore, as a PGE Group, we intend to invite as operators of such mines to work with us on just transition and to focus on minimizing our impact on the environment. And the most recent agreements are a good example for such cross-border collaboration and the Neisse Euroregion. As PGE, we are fully committed to keep goods neighborly relationship and cooperation with our neighbors from Czech and Germany. And we want to keep the dialogue going. Let me say that as a transformation of the Turow [indiscernible] region, we actually pass on to the marshal's office, new projects that will support the regional just transition plan. Altogether, we filed 6 projects, including wind farms for 150 megawatts, photovoltaic farm for 100 megawatts, energy started facilities working with renewable sources and low emission heat and power plant for the city of Bogatynia. The estimated CapEx is PLN 2.5 billion, specifically for this projects. And now I would like to relate to the strategic coal reserve Naby -- NABE since such questions were actually voice prior to the conference. And we are actually upholding our position that setting up the special National Energy Security Agency is necessary to keep the electricity supply stable in Poland and to keep the jobs going on as well as our investments in renewable sources. Energy transition program is part of the government work and the Ministry of State Assets just published the new document, the transition of the power sector in Poland, and the consultation for the social partners have been started. So this is just to ease the doubts of the social partners. And according to the timetable, the acquisition of shares in the coal companies by the state will be at the turn of the second and first quarter 2022. And the first phase is to restructuring to organize our companies that will be contributed to the new agency. So first, we are actually preparing the mining and the conventional generation to be the integrator of lignite and coal assets. And to us, the transparent dialogue with the stakeholders is a key thing, and it goes without saying. This particular project is critical for the energy security of Poland in future to come and an overall future of the Polish power sector. Therefore, it is obvious for us that we need to work hand-in-hand with the social partners. This dialogue is unfolding as we speak as a part of the transition process. We are also very committed to keep the transparent dialogue with our shareholders. After the last week event, we've seen how the capital markets may react to negative news, even when they are not funded by business performance. Therefore, we are actually looking forward to shareholders treating our shares as long-term assets and the long-term investors who are there to actually take advantage of the value growth of the company. We continue to keep the transparent dialogue, and we want to better explore your expectations. So I'm glad that this negative news that spanned across the media space last week, and that sort of swing on our stock price. Well, we were able to bounce back to that previous position and therefore, this price drop was actually offset by further growth. So thank you for your trust and confidence, and please be assured that we are going to continue to deliver our transition plan, and we are going to build value for the future. So I'm quite confident that all the shareholders will be having expected returns. And I understand that ESG is an important thing for the investors. And we are continuing our efforts to deliver more information on that. We work to better illustrate the direction for the future development of the PGE Group. So we are going to show our carbon footprint in a few days. We are going to publish the nonfinancial report of PGE Group so that you may explore more information about our business. So thank you. At this point, I would like to pass on the floor to Piotr Sudol, who's our CFO for the group.

Thank you, Mr. CEO, ladies and gentlemen. Q1 is behind us. And as you now probably have the opportunity to look at our results, they are good or very good, depending on the area. And I'll try to walk you through a brief presentation in a nutshell, starting with the background, namely the whole energy market in Poland, production demand and prices, and then we will move on to the operational results in our capital group PGE. And then we will move on to a brief discussion of financial results, investments, and we will finish with an outlook for at 2021 versus 2020, broken down into all segments of our operational activity. Electricity energy. Now what needs to be pointed out is a significant growth of production, 6% almost, increased use 4%. So that's 1.7 terawatt hours, that's the difference between 0.7 terawatt hours between use and production. And this as a result of shrinking net import. It was due to temperature and demand when it comes to industrial production, temperature. Maybe you will remember January, where in Madrid, there was -- one could simply ski, and this had impact on us as well. And this allowed us to increase production, eliminate import and even export of electricity. So January, international exchange around 0%, but nationally fall by some 25%. And you could say that the increase is a result of low base, namely lockdowns implemented in 2020. But please bear in mind that this was -- had this happened around March, you can see an increase in March, almost 8% increase in production and use but base effect will be much bigger in Q2. We can see in April that the increase will be much more impressive. Now when it comes to prices on the futures market, so you can see that the price was much lower than last year, more than PLN 30 lower. At the same time, CO2 costs that were increasing, and they were higher by PLN 6, PLN 7. So our margin decreased by some PLN 40. And what you can see here is the base price for 2021 is PLN 294, an impressive growth but this growth is still slower than much aggressive growth of CO2 prices, which you can see on the dotted line. So a big pressure on the results in 2022, mainly. In 2021, quite decent results. A sum up of operational results. Now we are moving on to the PGE Capital Group. Except for the turnover -- abroad segment, all other segments have grown significantly. Starting from the bottom. Heat sales increased by 3.3 petajoules and 15% growth, thanks to temperature. So the winter had to be called our dream came true, so that's why we have such impressive increases when it comes to volume of heat sold. Moving on to the top production. Net production of electricity increased by 1.7 terawatt hour, and if you remember on the previous slide, we were showing increase in use on the national scale, that was 1.7. And one can say that our stable coal production filled that gap. And from an economic point of view, the increase mainly -- was mainly related to lignite and that allowed us to improve the results in the segment of conventional energy. And now distribution of electricity increased by 0.3 terawatt hours, and it's mainly visible among households. That's the outcome of the fact that we are staying at home, everything is happening online. Mainly in the future, this increase will be lower, but we will be able to meet in person and talk to you face-to-face. And the last segment, this is sales and turnover. So globally, we can see 1 terawatt hour fall. And what is coherent with increase in distribution that increased sales to households. So the increase here is a 0.2 terawatt hours. How does it impact our financial results? And a significant increase in EBITDA, which investors and analysts are looking as well as financial institutions, PLN 400 million increase, some 25% increase looking at EBIT or net results. These increases are even more impressive, so 50% and 70%, respectively. And these results are -- and do not include one-off events. So this is a true result that was implemented by us. So it's worth pointing out that our net debt at the end of March vis-à-vis end of December grew only insignificantly, only PLN 600 million. Even though at the end of March, we settled -- we procured allowances for CO2 amounting to PLN 4.6 billion. So this -- this was set off by high EBITDA, PLN 2.2 billion, change provisions or reserves for -- due to allowances in 2021. And what is worth pointing out, implementing a sales transaction of shares in PGE EJ1, that was more than PLN 300 million, which increased our net debt at the end of March. The main factors that had impact on EBITDA between Q1 2021 and its respective quarter in the previous year. 2 significant events: decreased margin, heat and electricity, as you can see, fall by PLN 300 million. And that's a result of falling electricity prices by more than PLN 30 per megawatt hours. And higher costs related to CO2 allowances resulting from 2 facts: unit price PLN 6 or PLN 7 higher vis-à-vis 2020 and no fee of charge allowances, no free allowances related to production of electricity. On the other hand, the shrinking margin was covered by revenues from the capacity market. And that -- this market is broken down into conventional energy hip and renewable energy. Capacity market sort of replaced part of regulatory services that were withdrawn. So PLN 580 million of those regulatory revenues were covered -- that covered the smaller margin. And we have PLN 235 million, these are revenues from sales of heat, and that's partly due to higher sales price and higher production volume that I mentioned before, more than 3 petajoules increase in sales. The weather was conducive to this result. Moving to the end of this diagram, something that I would like to point out to. It is a much better turnover result, sales result. So here, you can see the cost of procurement of electricity. And another element of cost optimization, PLN 75 million Q-to-Q when it comes to HR costs. And the last item, PLN 150 million. Some PLN 90 million in that are higher activated cost -- costs that were activated earlier. So they were simply shifted from profit and loss and moved to balance sheet. So it didn't have any impact on cash flows. But this is a bookkeeping presentation -- accounting presentation. As I said earlier, activated costs were down since our CapEx was also underdelivered. And here, I need to draw your attention to a few facts. First of all in 2020, we had to pay a down payment for general contractor for 2 CCGT units in ZEDO and very advanced development of Unit 7 in Turów in 2020. At the turn of Q1 and Q2 2020, we've announced a very detailed review of the CapEx projects and R&D projects so that we may focus on projects that have a higher ROI and offer most efficiency. Since our CapEx looks differently than what you might have seen in 2020. And the third thing is our perspective and approach to CapEx projects. We tend to look at it from different perspective. We don't -- we are no longer interested in the accrual basis but a cash basis. We want to see how the cash flow unfolds. So the money we invest in has to be back at the appropriate rate of return. In Q1, we had a lot of payments that were still for 2019 investment projects. In 2021, we turn around our approach. We are going to focus on the cash position. Therefore, it will certainly impact the comparison of these numbers between 2020 and 2021. And let me mention the weather again. As I said, excellent volumes, excellent distribution performance and conventional generation was also coming out strong. However, there are always trade backs. Well, the generation was at harsh weather. So -- but at the same time, CapEx could not be delivered with such harsh weathers since we underdelivered in renewable sources and also the distribution end. So there are 2 impacts, switching from accrual basis to cash basis and also CapEx project delivered in terrain, where we were affected by the harsh weather conditions. And the final slide in this part of the conference is the outlook for 2021 as compared to 2020, we are comparing 12 months to 12 months. So starting from the left, the conventional generation. For Q1, good performance, better-than-expected. Nevertheless, we are conservative, and we believe that the overall result for 2021 maybe be actually lower than the results that we delivered for 2020. I think that I need to mention here that conventional generation, well, lost its leadership in our group. Now the distribution took over. But when you look at Q1, the heating sector was on par with the conventional generation. Prior to that, I'm not saying that it wasn't possible, but no one would ever think that the heating sector can deliver such great numbers as the conventional generation. So heating had excellent Q1. And therefore, it will be driving factor for overall performance in 2021. Renewable sources were definitely up. The new farms that were deployed in 2020, and the acquisition of Skoczyklody farm help the renewable energy improve its performance. And renewable energy is mainly sold on the spot market. So when the price goes up, and in case of conventional generation or heating the price may not cover our cost due to the increased CO2 allowances costs. Well, the renewable electricity definitely benefits from such high prices. The distribution, we expect to be on the same level as last year. Our regulatory assets were up by PLN 1.5 billion. So we do see some growth prospects on a year-to-year basis. And sales, excellent performance for Q1 2021. And we are going to sustain that. And we believe that on a year-to-year basis, we should be able to increase that. And our electricity procurement as well hedged. So revenue actually covered the cost and we have the retail margin on top of it. So now we are going to focus on prosumers and how to settle the accounts with them. It's usually a 6-month cycle. So the Q1 is based on the estimates based under declarations. But after Q2 2021, we should have the actual reading, and we should see, to what extent, prosumers negatively impact our sales. And the second thing about prosumers is that we have a high-growth of new installations and increased generation of electricity by prosumers. Thank you.

At this point, we have close the main part of this presentation, and it's time for Q&A.

We have already received a lot of questions for our meeting. So let's move to the questions. . The first question is from [indiscernible], and the similar questions from the Trigon Brokerage House. Have you already calculated what part of your debt will be contributed and transferred to NABE? Is the estimated transfer of PLN 10 billion likely to happen? This question goes to the CEO, Mr. Wojciech Dabrowski.

Thank you. I understand that this is the median use. About PLN 18 billion debt of power groups, power companies in Poland, that will actually become part of the National Energy Security Agency, and this is the rough estimate of total debt. And this debt could be transferred from PGE. And actually, it has to do with the coal assets. And that should be also recognized for the value of such assets. Today, I'm not able to say whether we can actually have the full debt relief. It will depend on the analysis. And the government will take actually the decision about the final direction of the transition. Each zloty that is taken off of our debt balance improves our CapEx position, and we can continue to invest in zero-emission and climate-neutral sources. So hopefully, there will be a major relief coming from that.

Another question goes to Mr. Piotr Sudol. What is the CapEx for 2021? What is in the plan?

Ladies and gentlemen, as I discussed our financial performance and the CapEx for 2021, I highlighted a number of developments that determined the delivery of CapEx for 2021. I've already said that at the turn of Q1 and Q2 2020 was the moment when we actually made a thorough review of all the investment plans across all the segments and across all the areas. Hence, it is estimated by 2021 may actually see the -- less CapEx, that the delivery could be like 10% less than PLN 6 billion of 2020. So probably, we will be between PLN 5 million and PLN 5.5 billion. The question is really about -- is only about 2021, but I think that we should be more forward looking. So 2022 is when we believe we should get on the growth path. And that would be driven by renewable sources, offshore wind farms and the entire development process of EW 2 and 3. The cogeneration contract for CCGT at Czechnica and the acceleration or perhaps a timely delivery and great advancement of the 2 gas units that will be deployed at the current ZEDO branch. So this project will be part of the PGE asset base. And something that may seem obvious, but pandemic may actually have some adverse effect on the delivery of CapEx. If there is the fourth wave of the pandemic, perhaps our CapEx will be delivered at the lower level, but the range between PLN 5 billion and PLN 5.5 billion seems to be realistic and fairly safe.

So let's move on to the next question that we got from you. You were signaling the progressing negative impact of prosumers because of the settlements of the distribution service, that hasn't been shown in the Q1 numbers?

I believe that I've already mentioned that when I discussed the outlook for 2021 and the overall sales. Q1 was very strong, but we are actually trying to sort of tone your expectations because of prosumers. As I said, Q1 is relying on the estimates, and we are going to make settlements after Q2, after the 6 months of 2021. This is when we are going to find out what is the actual impact. And then we will be able to observe the connected capacity over the next few months. So we will see how many prosumers will be connected. So Q1 does not show any major impact. And hence, it was not highlighted in our financial statements. But we will certainly revisit this topic when we are going to discuss our performance for the first 6 months of 2021. And this is when we are going to show you more tangible data from actual readings.

And another question that we are coming back to. So we've been coming back to each quarter when we are -- been discussing results. How come PGE is not paying any dividend? This is a question to the CEO.

Yes, indeed. We are recommending not paying a dividend for 2020. Although, the final decision will be taken by shareholders at the Annual General meeting. The decision is in line with the current dividend policy in which the company's debt analysis and investment plans play a key role. The information itself, which was published by us in accordance with the stock exchange obligations did not cause any significant relation -- reaction in terms of quotations, which proves that the market expected such information. I would like to assure you, however, that PGE will have a clear policy of profit sharing with its shareholders. What is important is that it must be in harmony, in line with the development of the company. Only when we -- the issue of spin-off of coal assets settled will we be able to precisely determine PGE's situation in the coming years, and PGE's dividend policy will also be reviewed at that time.

Another question. A question addressed at Director Sudol, whether such good results in the sales segment will be continued in the future quarters?

I've already mentioned that when I was discussing the results for Q1 in this segment, but something that I haven't said yet in this context is that the result of sales, it's not just sales to households to retailers and SMEs, but the results of sales are also results -- also involve the management services on the wholesale market. So part of that is very stable part of the revenues, and it's inside the group. What's outside sales to final customers. A very good Q1 result. We are maintaining it, assuming that in total, the sales results should be better than in 2020. But the risk, mainly something that we've mentioned before prosumers, their amounts, their capacities and their connected capacities and possibly limited use because of possible lockdown. But few last quarters have shown us that we've been doing really well.

Another question sent to us from the Brokerage House, Santander Brokerage House. So in your announcement, you were writing about offshore project and about subsidies. And these extra payments, it is an amount that PGE will receive as an extra from the partner above the sales price, just as in the case of Pol-America. And I would like to ask CEO, Dabrowski to answer this question.

Ladies and gentlemen, those extra additional payments should be treated in the same way as the equivalent of PLN 686 million that we got in the first part of the project. So this money belongs exclusively to PGE. And this is what I wanted to point out, and it will be used to finance only this investment. Thanks to PLN 686 million of this basic payment that we received, this core payment, PGE we will no longer incur capital expenditures for the project, at least until the final investment decision is made. And when the decision is made, we will be entitled to conditional payments that we've already communicated. We said that this amount will be some around PLN 1 billion, and that PGE will be managing or using this extra billion. So it will be used only once our partner has given this PLN 1 billion and once we've decided to implement this investment.

Another question concerning renewal energy. Were the revenues from the power market come from in renewable energy? A question to Director Sudol.

Ladies and gentlemen, when it comes to revenues in the segment, they apply to pump storage, and these facilities have already provided services to PSE. And the capacity market in this segment replaced the previously provided services. So we cannot treat these revenues as a whole as an incremental marginal revenue in this segment. Although in Q1, the difference is in favor of this segment in favor of revenues of the whole capital group amounted to some PLN 15 million. And what's worth pointing out, since we are talking about this segment and the capacity market, these revenues will stay in the group after 2025. This is a deadline for conventional facilities.

And now another question concerning an increase in CO2 price. Whether -- so what is the impact of sudden increase in CO2 prices on the heating segment results? Question to Director Sudol.

And so as regards these results, the first quarter has been -- or was really good. But we see no risks here because CO2 allowances for 2021 have been secured on the futures market. And the current significant increases on the CO2 allowances market should not have impact -- any significant impact on the results of 2021 in this segment. But something that we have concerns about is 2022. We are, of course, hedging emissions for 2022 on the futures market. But we are looking at spot results, which exceeded EUR 50, and the regulator responded, as we can see at the beginning of Q2, by issuing a regulation on compensation due to uncovered CO2 costs for 2021. So we're not -- so we are talking about -- sorry, 2020, and so uncovered costs should be covered. But this concerns generators using full cost method. And this doesn't apply to our CHP plants, which use reference prices. And these enter into force with a lag with a delay. So to sum up, 2021, we'll see rather no significant risks in terms of CO2 prices, but there are significant risks in 2022 and the possibility of transferring costs of CO2 emissions in tariff price -- the tariff prices.

Slowly, but surely, we are getting towards the end of the conference, but we have 2 more questions. The first question is about Belchatów. When Unit 14 will be back in generation?

Our engineering team is currently reviewing the outcomes -- negative outcomes of the fire. But as of today, the unit is shut down by end of May. According to the baseline scenario, it should be back into regeneration starting June 1. There is a risk that the damage could be a more substantial than shown initially, and we will keep you updated on the developments. And the final question to is about the base price for 2021. Is it above the variable cost of the hard coal-fired power plants? And how does that compare to the variable cost of the lignite-based generation. Well, this is a fairly complex arithmetical question. I'm not sure if I can count the numbers in my head. But I already said that for conventional generation, we believe that 2021, despite excellent Q1, overall, the total result will be below 2020, which means that the contribution of the margin generated by this segment will be lower. I'm not sure if I was able to answer your question about the base price versus variable cost. However, as far as CO2, 2021 is well hedged for both segments and the future markets. And the average actual price that will be charged into the cost of 2021 will be much different from the current pricing on CO2 market. What is of a concern for us for both segments is 2022, because that hedging will be based on the spot prices of PLN 45, PLN 50 and higher.

Well, as we said that we are getting to the end of the presentation, we got some more questions, but since we are on a very tight schedule today, we have to bring this conference to a close. However, we are available to you as a press office and the Investor Relations team. Well, thank you very much for joining us today, and thank you for questions that you sent. And in the next 3 months, we are going to present the first half of 2021. We are going to meet again in September 2021. So thank you for today, and looking forward to seeing you again. Thank you.