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

[Audio Gap] in line with the commission's concept carbonization is based on electrification based on renewable energy sources because this sector has the biggest potential according to the commission, it becomes clear that under the reforms of the package, electricity will be most emphasized. But transport is also mentioned, which is why it is important not to over burden, is not to overload this and not to overestimate the other capabilities of the other sectors. And there is this special situation of the Polish sector that is mostly based on coal, even though the share of coal is decreasing every year. Fit for 55 means big changes for district heating. Well, this is the reason for concern for us because we are the biggest producer of heating energy and unfortunately, the commission is not showing sufficient understanding for the specific character of the particular mandate. Poland is a specific country as regards to district heating and its development. And -- these solutions that the commission is proposing are making our transformation on the heating market, difficult and will hinder further modernization of the heating system. So we are very actively involved in the works, and we are sending our comments regarding the specific nature of the Polish sector. And the expectations connected with the package is switching to renewable energy sources within a few years, and this is not realistic, but we are offering certain solutions, and we hope that this will be clarified. We are offering explanations of our position. So in general, the most important issues that I wanted to mention during the first part of the presentation. That's all. Now we will actually move on to the presentation that will be given by Lechoslaw Rojewski, Vice President of the Board for Finance, CFO. He will talk about the financials after the 3 quarters.

Thank you so much. Ladies and gentlemen, my presentation on the financial results will be divided into 2 parts. The first part will and be about the current situation in the third quarter 2021. And then I will shortly tell you about the prospects for 2022. Let me start with the electricity market in Poland. As you can see on the slide, well, the consumption during the third quarter of 2021 was higher by 2 terawatt hour. And that was mostly because of the higher demand for electricity during that time, but it also translated into the growing balance, the change of balance between import and export. During the third quarter, our export went up by 1 terawatt hours. What was involved here, mostly the growth, the growing prices of fuels, but also the growing price of natural gas. And therefore, Poland, as compared to the neighboring European countries, had the net energy price of, PLN 404 per megawatt hour. So Czech Republic, Slovakia, PLN 455, Sweden PLN 413 per megawatt hour. This is a unprecedented event because, well, it was the first time our export was so big. On the other hand, it was also affected by the GDP growth because the GDP reached 51% in the third quarter. And against the same time last year, it was at least to 1.5% higher. So those 2 elements, factors contributed to the growth of production of electricity by 18.5%, reaching 6.7 terawatt hour. And this, of course, made us create this amount of energy in conventional sector in order to cover the demand. Now moving on to the prices on electricity market, you can see that the natural determinant of the price was the growing prices. When we compare the situation to 2020, the price of energy contracts was PLN 34 lower per megawatt, whereas the level of CO2 certificate remained on stable level. And that translated on to the downturn of unit prices contract. Whereas the contracts for 2022 are more expensive, so megawatt hour is more expensive by PLN 122 and that is connected with the rising trend for -- of the prices for CO2. So the growing prices of CO2 certificates contribute to the growing prices here. We are also seeing the spread changes. This is mostly because we had a dynamic situation on the electricity market, the prices of fuel were rising, and there was a lot of uncertainty on the market, uncertainty about the future. Hence, everyone wanted to hedge their positions in the contracts for 2022. And we are talking about simplified CDS, we are still not taking the production fuel wells into account. So we cannot actually refer it against the production margins. So on the one hand, we have to see that the emissions of different generation sources because it differs between different types of coal. So now summarizing the third quarter financials. So we may say that generally, the growing production of electricity reaches 6.7 terawatt hour and 50% of this growth is contributed to PGE, because we generated 3.3 terawatt hours. And that translated on to this situation as follows; so from and the conventional segment, we -- in the conventional segment, 26% growth in coal and 30% growth -- 26% in lignite, 30% in coal. Now Also, we have to remember that the higher prices of fuel wells were very important and contributed to the price of electricity. Now about the gas production, the drop by 39% because of the growing prices of gas. And now looking at the distribution, the distribution is -- has grown by 4%. It is a little bit lesser than the national demand for electricity, whereas the distribution segment, the sale for end users dropped down because the demand among the business clients went down. We are talking about minus 13%. So now actually referring that to tariffs that has been presented under tariff A and B. Because we had lower temperatures in September, therefore, there was a slight growth in heat segment by 0.3 petajoules. And now ladies and gentlemen, we are moving on to crucial factors behind EBITDA. And they show us that during the third quarter of 2021, we have generated EBITDA of PLN 2.110 billion long term. This is a very significant growth against 2020. And the crucial factor here was the growth of generated energy, especially the volume of the energy that helped us to generate a bigger EBITDA value by PLN 943 million. So in total, the final result of sold energy despite the fact that the price was PLN 3.3 lower per megawatt. Well, the salt energy reached PLN 890 million. And together with the bigger volume produced -- electricity produced, we also had to pay significant costs per resources, the fuel wells that we needed to produce the energy but also the cost of CO2. So the total cost of production was minus PLN 105 million. The impact on the diminished production margin, this was also affected by the system services market. But it was leveled mainly by the income from the power market, which in the third quarter was at the level of PLN 728 million. So the total effect on the system services was PLN 589 million. So the result for the sales of electricity to end clients, this grew by PLN 120 million, a year-on-year the growth was lower than in the second quarter. But we must remember that the second quarter was the quarter with the strong COVID effect -- COVID impact. Of course, we are referring to the third quarter of 2020. The distribution margin for electricity was higher by PLN 35 million with the decisive growth at the level of 4% regarding the volume. So to sum up, let's pass on to the next slide. To sum up the third quarter 2021, you can see that the EBITDA growth was at the level of PLN 387 million. The EBIT operating profit, PLN 503 million and net profit of PLN 285 million. Of course, the reported EBITDA is higher by PLN 564 million. This is impacted by individual events. The negative impact of recultivation reserve and the rollover of a CO contracts PLN 641 million. As regards to the rollover of CO2 contracts, I have to tell you that this is a one-off event. This was done in connection with the optimization of cash flows. And as regards to the result of '21, this will have no impact on the result because on the one hand, we recorded revenues on the other hand, there was the reserve will be compensated at the end of the fourth quarter '21. Let's continue. Let's pass on to the next one, investments. Investments, this was around PLN 1 billion, and it was lower than in the past year. Mainly, this was due to the fact that we finished -- that we already finished investments in building of the 7 block in total. On the other hand, the time line of the particular investment processes is moving in time and in the third quarter '21, we recorded a smaller growth of investments. And as the CEO said, we will be entering the period of intensified investment at -- to gas and steam blocks at Dolna Odra and investments will grow. The same pertains to the projects connected with district heating, again, district heating there will be considerable investments in Czechnica, which is now at the initial level of construction. But let me remind you that as regards the CCGT construction, the planned date for its delivery is the end of '24. And as regards the debt, net debt, net debt in Q3. Of course, you can see that in comparison to the results that we presented for the first 6 months, it's down by PLN 3.370 billion. And and net debt-to-EBITDA is at the level of 0.29. This translates to high EBITDA PLN 2.1 billion, which is also aided by CO2 -- contracted hedged by CO2 contracting with forward contracts. And of course, cash investment spending that -- and now it's PLN 1 billion. Also, there is the effect of -- this is -- there was the adjustment by forward payment for CO2. And if we show you that because for CO2, we will have to pay theoretically the level of shifting, the spending's from the reserve will result in a situation where the amount of PLN 2 billion. We will have to add around PLN 8 billion, so the net would be around PLN 10.7 billion, which would make the net debt-to-EBITDA reach by 1, 2 or less than 1, 2. So we need to observe that there was a significant influence. This contributes significantly to increase the debt. But in the context -- in the macro context, this does not significantly affect our debt. And like I mentioned before, briefly about the '22 outlook, both regarding EBITDA and regarding CapEx. And we are forecasting that this is going to be a demanding year. This is going to be a demanding year, which doesn't mean it's going to be tragic -- demanding doesn't mean tragic. And it's going to be demanding because the situation on the macro market shows that the prices of CO2 emissions, our emissions capital are growing and the same goes for the level of exchange rates. But let's discuss the segments. Conventional generation, the average price is growing, but the effect of the growing prices of CO2 will also impact our costs. We are not expecting that we will be -- as big an exporter as we are now because we are hoping, and the world is hoping that the well -- that the price of -- the price will stabilize. So we need to -- we have to -- so it's about the import balance. And with a further grow of CO2, this has to impact the generation volumes, which, of course, will affect the margins. As I've said, we are expecting that the raw materials situation will be stable, especially when it comes to coal, because we've reached the stage of implementing contract with the supplier of this raw material. We've signed the contract. So we are not concerned about a rapid growth of the price of this raw material, whereas the district heating. Unfortunately, it will be, as you can see, affected by the growing price of CO2. So we are analyzing the situation. And we can see that the growing cost of CO2 will double, it will be twofold increase in cost of CO2, but we are also expecting that the average price of contracted natural gas can increase by approximately 50%, but to be a little bit more optimistic, in renewables, we expect the growth of price on the spot market, we expect that the prices of electricity will be higher. We also expect higher prices of green certificates, and that should positively affect the EBITDA for electricity. And now regarding distribution segment. After a very good 2021 year, we expect that this segment will be under the pressure of the growing cost of purchases of energy and green certificates. And here, we also see that there will be a need to cover the distribution services by consumers. Now about the distribution segment. Well, the regulatory asset base is higher by around PLN 700 million. It will not be as dynamic as this year, because let me remind you that in 2021, the growth of RAB was by 8%. And in 2022, we expect that this will be around 4%. Now also the return on capital, we hope that the average weight will remain on the same level as this year. But at the same time, we expect that also in distribution, the President of the Regulatory Office can appoint bonuses for reinvestments, reaching around 1%, and the average weighted cost of capital will reach the level of PLN 567 against PLN 558 this year. And now CapEx. We will be more dynamic in our investment outlays. Of course, moving away from the conventional energy because as the CEO has said the conventional energy segment is moved into another, and we hope for that, but we expect the growing low emission sources and the construction of 2 CCGT units in Dolna Odra. So techniques in district heating the growing CapEx on PVs, in renewable energy. And of course, you have to remember that at the moment, in the renewable energy, we have a huge land area that we purchased. And we are now applying for licenses to implement the PVs. And according to the strategy, this will help us to reach certain power. Now distribution, 2 important supply. In theory, so smart meters, we are forced to do that. There is a special program that requires 80% of installation of those meters by 2028, and the cable capacity, the average voltage that will decrease these failures. Thank you so much.

[Interpreted] Thank you very much. And this is the end of the first part of our presentation, our results have been discussed, and now we can move on to Q&A session. At first, I have several questions that were asked online from our investors. We have no investors with us here in the room today. So the first question is actually about CapEx. And this question is for President Rojewski. What will be the CapEx level in 2022?

[Interpreted] Ladies and gentlemen, as I've mentioned during my presentation, we are increasing CapEx. We are more dynamic in our investment process in 2022, especially when it comes to low emission sources and the crucial project here is the construction of 2 CCGT units in Dolna Odra. We are reaching the most capital consuming period in our investment, but also district heating is important here. We are constructing Czechnica, CHPP, and we also have increased CapEx for PVs in renewables. And as you know, we are implementing offshore processes. In 2022, they will not be a dynamic yet when it comes to CapEx, but we have to remember that we have to prepare for this very intensive investment process, and it will require a several million zloty in outlays. So we expect that the CapEx in 2022 should be around PLN 7 billion.

[Interpreted] And now the next question on tariff G, a very important subject Wojciech Dabrowski will answer that. What will happen in 2022 with tariff G, Prime Minister Sasin said that the energy companies cannot pay the cost anymore?

[Interpreted] Ladies and gentlemen, you probably heard that we've submitted our tariff applications. We are waiting for the decision of the regulatory body President. We hope that they will understand the cost that we had to pay and mostly because of the growing prices of CO2. This will be reflected in the tariff. But we are much big support of helping the most vulnerable. So Prime Minister Sasin said that we will be supporting those recipients that require the support. They are the most vulnerable here so that they are not the direct victims of the decarbonization policy. So we are very happy to hear from government that well, the situation on the CO2 market is outside of completely beyond our control. But that contributes to the cost of electricity generation. Also in Poland, which is one of the cheapest producer of electricity. Well, in other countries, this growth is much higher. So what we can do and what we do, we dynamize the outlays in order to ensure a cheaper energy sources and being more independent of the CO2 market. Well, personally and as the Management Board, we believe that the chip energy is our priority. And therefore, we focus on that in our optimization and effectiveness activities so that the energy price for our customers is as low as possible.

[Interpreted] One more question about investments. And this is about the distribution segment. What investment in distribution do you expect this year and to next year?

[Interpreted] In '21 in distribution because an intensive process of new connections is conducted, we expect and spending on investments about PLN 1.5 billion. Next year, there will be an intensification of the process connected mainly with installation of smart meters, which, like I said in my presentation, is connected with the requirement of the distribution system operators, which assumes that at least 15% of customers will be connected by the end of the year. And in connection with the process, in 2028, 2028 as regards to smart meters, 80% of customers are to be connected. So we need to take into account that by 2028, the entire process connected with smart meters will cost around PLN 3 billion. And another intensive investment process from the point of view of distribution is cabling for the medium-voltage lines, and this is connected with the impact of the atmospheric conditions. And this is connected with the quality aspect of the processes. We have 2 main -- 2 main directions as regards the development of distribution cabling and the installation of smart meters.

[Interpreted] Of course, we have a lot of questions from the Internet, but let's also ask those who are here with us if they have any questions.

[indiscernible] I have a few questions. The first one is about the auction for the '26, the power auction. So is it going -- it's going to be in December, what units will be at the auction? And is the financing for them? The second one is about financing.

[Interpreted] So let me answer now because it will be easier to answer, and it will be easier to match the answer with the question. As regards the auction '26. There will be 4 units in the heating sector [indiscernible] Gdynia, Bydgoszcz and [indiscernible]. And you also asked about Termika. Termika is planned for '27. So this is not the subject of the '26 auction. Gdynia, Bydgoszcz [indiscernible]. This is the answer. So with gas, everywhere, gas everywhere.

[Interpreted] Second question is about financing of the project of the first wind farm of PGE, so there was a financial advisor selected. And what is the stage of obtaining financing for this project?

[Interpreted] Societe Generale is the advisor, the main financial advisor, and now we are at this stage of preparing the documentation. So the advisor in cooperation with us developed teaser, which will be sent out to the financial institutions worldwide.

[Interpreted] And the third question is about CO2 and forwards. You mentioned that a big part of the permits are purchased on forwards. And what if the prices of CO2 drop to EUR 50?

[Interpreted] You are probably asking about '22 and '23. So conscious risk management is about hedging the margin and not about looking for additional profits on project like CO2, after selling every megawatt hour, our goal is to hedge its margin by purchasing the relevant certificate for CO2 and hedging the exchange rate of euro to PLN. So we are -- if -- and we are just looking at the margin, and we are happy with the margin when selling every megawatt hour, gigawatt hour, terawatt hour we look at the margin. And if the margin is at a satisfactory level, we don't look at what's going to happen then. This is our risk management policy, which we are implementing. We are not a trading company. We are not a speculator. So that's why how we look at this. So we have set a special type of accounting, and it's fully secured.

[Interpreted] Next question is about the growth of prices at the C tariff for small and medium enterprises. Can you tell us how it looks for '22 and '23?

[Interpreted] So the prices in these tariffs, we increased them 2x. So we don't have any decisions about further changes. So the first or second quarter. If a change like that happens, we will, of course, be informing the clients today.

[Interpreted] And how much did they grow back then in August and before so adequately for the market?

[Interpreted] And in percentage, when you analyze the prices of our competitors and our prices will find the answer there.

[Interpreted] And one more question about Turow about Dolna [indiscernible] is demanding that you disclose the plans for the closure of a Turow plant? Is there a chance for that?

[Interpreted] So I'm -- this is the first time that I hear is that Dolna Gdansk do the information disclosed because well, this is the secret of our company because such strategic information. We are not disclosing such strategic information, not disclosing it publicly. I can only say that we assume that Turow will work until 44 and I can't see any problems here. What would this disturbs -- what should this disturb. So this is just to reassure the workers, someone has to produce energy there and Turow will be operating and -- But they are saying that they need a plan for 44. When the particular blocks will be closed. But like I told, this is the company's secrets about strategic decisions that we are not disclosing publicly. And this information, the voivodeship administration has this information. And that's what I can say about this.

[Interpreted] If if I may add something. The Marshal received the plan from us for disconnecting the blocks. And they can notify this plan to the institutions that require the data to make further steps regarding the financing of just transformation in the region.

[Interpreted] Unfortunately, I can't hear this question because it's not asked to the mic. Bottom is Podlaskie [indiscernible] I have a question about what the CEO said about the advisor for the NABE process. You mentioned that he will also be advising on the notification process. So I understand that the establishment of NABE will be subject to the notification to the European Commission. And if so, I wanted to ask about the time line because some months back, you said that if that process of isolating the asset does not finish within the planned time. PGE can lose its financial liquidity, even. So considering the long process of notification, looking at the social contract with the miners. Is it not so that the notification process will affect your time line the '22, the year 2022? This is my question.

[Interpreted] Well, the advisor also covers the proceedings under notification process mentioned by you. So there are no concerns here when it comes to the time line. Now we are in dialogue with the social partners because this is a very important part. Well, we can quickly start our investments, but we need the consent of our social partners for this very complex process that will be a groundbreaking process for the future of the mining and electricity industry in Poland. Well, the negotiations are conducted. There are concerns are here. It's natural because this process may invoke some concerns, but we as the governmental representatives, the companies, we are continuing the dialogue. I am quite positive about it. Everybody believes that NABE is something very important. So the separation of those companies to a separate body. Also so the Prime Minister recently in his speech said that number will be created in 2022, and we stick to this time line. This time line is still a very realistic and it is possible that it will be implemented according to the objectives. So if the CEO allows me, let me add because you've mentioned the possibility of the lost liquidity cash flows, there is no concern of that. There is no such a threat, another is necessary for us from the perspective of financial sources. You know that the carbon footprint right now in many bodies in many banks, also in Poland is perceived very negatively by the banks, by many institutions and bodies. And in order to continue our investment and purchase process, see it is necessary to show that we are moving away from this carbon footprint and this will help us to obtain cheaper financing on the market and, of course, to have far more debt because we've repeated that several times because we have information from banks and financial institutions that they will give us more money, and we will be able to have a higher debt without coal assets, continuing this clean energy Bydgoszcz. Well, are the banks giving you the conditions that just the separation of the coal assets from PGE. Yes, we can put it this way because the condition is that we have no coal assets. So we can say that banks give us this condition if we want to get more money from them. So -- but this is in general a global-wide trend. It's been going on for quite a while. And so more and more in financial institutions share this kind of declaration with the general public that they will not financially support coal companies. So in 2023, we can actually expect higher outlays for the renewable energy sources. So what we are planning right now in the renewables, these are the investment plans that are known to you. We have actually an idea how to finance that. We have money to finance that. I am talking about the biggest investment outlays in renewables. We have money for that. So investment plan for 2022 is not in threat. We are also having a long-term perspective. And as the CEO has emphasized so increasing the availability of money that can be received from first of all, foreign bodies, foreign institutions that block this possibility right now for the companies like ours with a carbon footprint sleep still. So definitely, once the NABE is created that -- then it will be easier to get money. So we could think who is financing the heat and power plant in India and China, who's financing the debt? Maybe these are the same institutions that refuse others to build this kind of blocks.

[Interpreted] And another question. Can you specify the level of capacity of power produced by renewables. How much this will change 2021 versus 2022? Because the strategy sets out some milestones in renewables. Are there any concerns here? Are there any risks when it comes to implementation of those plans? How this will -- what's the outlook for 2022?

[Interpreted] So in addition to the investments that you know, we also have a very wide spectrum acquiring activities. Also in the renewables, there is a lot of movement on the market when it comes to the wind farms on land. So this will be depending on the transactions that we finalized, but the share of renewables in PGE is growing. So the President of the Energy Regulatory Officer mentioned that some of the projects are not -- do not have financing. So I know that you have financing. But we are talking about those who take part in auctions but cannot actually do that later on. So we have some people coming up us and with this kind of proposal and we analyze them. And we just check the profitability. And what is the power, the capacity in renewables. Can you declare anything? So in 2023, it will be '25 in Podlaskie voivodeship. Well, we will have to check that, and then we will get back to you.

And the last question, you plan to ask for money from the KPO? Is there anything that is going on is a concern to you?

Well, it is a concern to all of us, to all poles, not just us, but I am convinced that the European Commission will this decision and give us the money so that we can implement our projects, including energy projects because we've applied for several energy projects there. But you can what is going on in the diplomatic processes. And we hope that we will reach the decision that will be beneficial for Poland. But this s a political decision. We -- it is beyond our control. But I understand that there are no risks when it comes to the time line. Well, we have the money to finance our investments. Well, we've notified the development investments, big investments. So this is not up to -- it does not depend on the KPO money. This is 11:10. I think we have time for the last question.

[Interpreted] The last will refer to the investment in the heat and power plants in order to produce heat, they need coal and as we know in the heat and power plants owned by PGE well, the situation was different, right, when it comes to coal storages, coal inventories. Some reported that inventories were below the legal thresholds. But I understand that PGE prepared a plan to reach the right level of inventories. I'm talking about Opole. So I wanted to ask you if it's not a confidential information, how will replenish the inventories if the PGE says that they will not produce more coal than it was ordered last year?

[Interpreted] Well, it's not confidential. Of course, we are open, as usual. So temporarily, the inventory in our generation sources dropped down, but in order to normalize the situation between producers, transport companies because there are some bottlenecks there as well. Vice Minister [indiscernible] became a coordinator of the whole process. So we dealt of this -- with this process in 2018. This is not the first time. We need to remember that now we are using much more fuel because we are producing my much energy than we planned. It's above the plan, above the norm. So that's why we have such excellent financials. The plans were different, the production is bigger. So it is only natural that -- and also transport company had some date plant and PGG. But this year, we are not envisaging problems that would limit our production. But the Ministry of State Asset and Ministry of Health [indiscernible] is involved. We are actively involved to today or tomorrow, he is [indiscernible] and we'll be talking in the PGG -- with PGG. So I'm sure that we will solve this problem. It's a [indiscernible] site as regards coal production every year's ups and the downs. Now we are producing more, and they are producing slightly less, but I am convinced that PGG and transport companies' firms that transported coal will solve this problem, we'll cope with that.

I believe that there are many more questions, so we will also be available for some time after the conference. We also have questions from the Internet that will be answering via e-mail. Thank you for attending and see you at the publication of the annual results beginning of next year. Thank you very much. Thank you. [Portions of this transcript that are marked [Interpreted] were spoken by an interpreter present on the live call.]