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

Ladies and gentlemen, I would like to give you a warm welcome at the press conference of PGE Polska Grupa Energetyczna on Financial and Operating Results of the First Quarter 2023. And with today's conference, we will have President of the Board, Wojciech Dabrowski; Vice President of the Board of Finance, Lechoslaw Rojewski; and Director of Finance Division, Piotr Sudol. My name is Konrad Mróz, and I'm the Head of External Communications Department. I will have the pleasure of chairing today's conference. At the beginning, I would like to give the floor to the CEO, Wojciech Dabrowski.

Good morning, ladies and gentlemen. We are meeting here at our cyclical conference summing up the first quarter 2023. Financial results for the first quarter this year are good. We have tangible results of our work, which I would like to extend thanks to all employees of the group. But at the same time, if we look at the scale of our requirements, they are not sufficient. EBITDA at PLN 3.4 billion was 31% higher than in the first quarter last year, which stood at PLN 2.6 billion. And PLN 1.7 billion was the net profit, and this is the amount which we spent on investing in energy transformation. So at PGE, any profit equals investments in renewable energy sources, all net profit was spent on expenditures on investments. At the same time, as the company responsible for ensuring energy security to millions of Polish. We are actively involved in governmental activities aimed at minimizing energy increase for our customers. As an ad hoc measure, we will spend PLN 10 billion as protective measure, the shield so-called. Then secondly, we have huge investments in renewable energy sources and low-emission energy sources. PLN 75 billion is the planned amount we spend on this, excluding the nuclear energy. So that is only water, wind and solar energy. And this is the amount we are going to spend by 2030. There is a vast requirement for such investments. But in order to build modern energy without CO2 to make sure that the energy of the future is cheaper, cleaner and that it successfully provides energy security, we need to develop. That's something that we can treat as a matter of course. Coming back to the governmental shield, which will contribute PLN 10 billion this year. This governmental solidarity program protects us against high energy costs today and investments protect us -- will protect us in the future. Progress in investments, a prepared information about the current investment progress in the group. So let me start with the renewable energy sources. And the key area of offshore wind farms, on the 20th of April, we signed an agreement with Siemens for Baltica 2 project. This was a tender that awarded that provide the possibility to buy turbines on the scale, where the blades of a single turbine cover the -- or the length of a full length blade as several times football [ pitch ]. We will complete the project by 2027, which does not disturb our schedule of delivering the first power supply. And the conclusion of the key main agreement, as you know, the cost of turbines accounts for about 40%, maybe 40-odd percent of the total investment, allows us to conclude further agreements for further components, which we will inform you later. As part of developing our potential and capacity on the Baltic Sea, we will carry out projects under 4 tenders that we won. Although we are still waiting for the final decisions of the ministry in this regard, but PGE will provide at least 7 gigawatts, and we are now applying for successive licenses, 7 gigawatts of wind energy in the Baltic Sea. As regards formal decisions, we expect them to arrive before the summer, before holidays, and formal decisions should also be announced soon probably at the end of this month, at least if we rely on what has been reported in the media. Another implication of our project is -- project have been new photovoltaic capacity. In 2023, we'll complete the construction of 23 photovoltaic installations. We are also boosting our water energy in [indiscernible]. Distribution, a very important area of our interest. As you know, we have a powerful distribution program, whereby we want to extend and modernize our distribution network. This covers all our activities in this regard, and in which we cover half of the territory of Poland. We spent over PLN 800 million in the first quarter to support this project, it was 3x more, more than 3x more last year during the same period, which is more than half of our capital expenditures. And that shows how important it is to us to develop our distribution infrastructure in order to be able to meet the expectations of our customers and keep pace with the dynamic development of renewable energies. We have a key program here also of cabling to achieve at least 30% cabling of mid-voltage lines by 2027. That's a very ambitious plan, but we are consistently implementing it next year alone. We want to have more than 2,000 of cables under this project. Another important thing that we completed within the group, let me remind you this milestone, on the 3rd of April, we finalized the takeover of PKP Energetyka. Now it is PGE Kolejowa. That increased our infrastructure by 21 kilometers, which made us a nationwide distributor of energy in Poland. As you know, PGE Energetyka Kolejowa, this railway distribution network made us the largest distributor in Poland operating nationwide. Nuclear energy, that is of interest to you because we have already received a number of questions on that topic. In the first quarter 2023, we worked on a nuclear power plant project in cooperation with a private producer of electrical energy, ZE PAK and the Korean KHNP. Concern, we talked a lot about the subject. We are very intense in our activities on the project. Yesterday and the day before yesterday, we had a broad working and technical meetings with Korean partners. So we are working hard in this process. At the beginning of this year, together with ZE PAK, we completed the preliminary plan of the power plant construction. We want to have APR114 (sic) [ APR1400 ] reactors with a joint capacity of 2.8 gigawatts in the first stage of that investment. We're also considering in the future, the construction of more units. Those 2 reactors represent the potential of 22 terawatt hours, that is about 12% of today's consumption of energy in Poland. And in March, we signed a ZE PAK agreement on pointing a special purpose vehicle, PGE PAK Energia Jadrowa, which was formally registered the day before yesterday. So it has been operating for 2 days now. In accordance with our plan, now we are focusing on preparing location environment impact studies for the power plant in the [indiscernible] in [indiscernible] region, and we plan to open the unit in 2035. Another area of our operations investments in gas infrastructure, final stage of [ CCGT ] units in Gryfino. We are advancing more than 90% at the end of the quarter, the financing was used up in more than 70%. This is the largest investment of this type in Europe, but one of the largest gas power plants that will be operational in Europe. This is of particular importance to the northwestern part of Poland to get this energy secured in the future, that will be the energy to stabilize energy security there. Another CCGT project is located in Rybnik. We started completion of this investment. We signed the contract with the General Contractor. Also with Elbis, we concluded an agreement on engineering contracting services that is a subsidiary of PGE. The project now is at an early stage of investment, but at the end of 2026, we want to have opened a unit of 871 megawatts. That will be one of the largest units in Europe. At the same time, we consistently implement the program of decarbonization of heat energy in Poland. This is something we have talked about to you on a number of occasions, that's based on natural gas, [indiscernible] are among the towns where works are being conducted right now. But we should also remember that we are building a heat power plant, [indiscernible] in the south of [indiscernible], which will deliver heat energy to the [indiscernible] agglomeration. And there the progress at the end of April was 45%, both substantive and financial. Everything seems to indicate that we will be able to keep the deadline of handing over the unit for operation in 2024. Another issue that we communicated and that is of great importance in the context of our operations and the future of the group is the update or revision of our strategy. Today, we are finalizing setting of our coal assets. So we are now revising our strategy based on the changes that occurred in the group and in the market in the recent years -- the recent 3 years. And I mean here, economic, social, as well as geopolitical changes. The trends that we have already identified and that we identified back 3 years ago additionally intensified, which confirms us in the belief that the direction of our activities as a leader in green changes in the context of continued technological progress will allow us to translate all those activities into practical achievements, at the same time, increasing the profitability of our projects. We intend to continue along those lines in the context of the economy that we have today and as part of implementation of our strategy that we will communicate to you at the end of June. We would like this to happen before the summer holidays. So that would be as regards the general overview. And now I would like to hand over to Lechoslaw Rojewski, who is responsible for the area of finance in the group, and he will give you more specifics on our financial results.

Dear ladies and gentlemen, I'll be brief on the financial situation of PGE Group. But before I do so and before I discuss the results, let me traditionally start with the situation in the electricity -- national electricity market, which also largely affects the operating activity of our group. As you can see, the consumption of electricity in Q1 dropped by 3% on a year-on-year basis. We believe that this is, on the one hand, connected with the drop in economic activity in our country as well as it can be attributable to higher temperatures, which you will also be able to see with regard to district heating and the use of thermal energy. In Q1 of this year, Poland became an energy importer because it was one of the 2 most expensive countries in the region, except in Hungary that had a price at PLN 649 per megawatt hour. Poland was second at the level of PLN 616 per megawatt hour, PLN 620 per megawatt hour. As a result of the decreased demand of electricity as well as the flow of energy from neighboring countries, the power generation dropped in Poland to the level of 7%. There was a drop by 7%. This drop in generation by 7% was particularly visible when it comes to lignite-based generation as well as hard coal-based generation. Later on, as I pass on to our group's results, I'll be able to show you the dynamics of that drop. Traditionally, of course, we've been observing the increase in RES-based energy, especially in eolic and solar installations. For the first time for a longer time, owing to the drop in the price of natural gas, also the generation based on natural gas also increased. If we take a look beyond Q1 2023, the first months of -- first month of the next quarter, i.e. April meant a further drop in electricity consumption by 8% year-on-year as well as the drop in the generation of power generation. That drop in the generation is a 2-digit drop, i.e. 13%. Well, you will know that there has been a surplus of RES-based energy twice, and hence, we needed to decrease generation from PV sources. Here you have a summary of Q1 operating results. But before we do so, I'd like to come back to the prices illustrated on the previous slide. And you can see that the prices in the forward market were maintained at a comparable level to those from August 2023 -- 2022, and future and forward prices dropped to the level to PLN 700 per megawatt hour. And I've seen the prices of forward contracts for 2024 being maintained at the level of PLN 700 per megawatt hour. The lower energy prices were, of course, caused by the drops in prices for raw materials, first of all, hard coal as well as, as mentioned before, natural gas. In [ RF ] contracts in Q1 2023, those prices were decreased to $150 per tonne in the case of hard coal from the level of $400 per tonne. And in the case of natural gas, it was a drop from EUR 80 per megawatt hour to EUR 50 per megawatt hour. Of course, prices are also conditioned largely by CO2 contracts, which in Q1 2023 fluctuated at the level from EUR 80 to EUR 100 and were at a similar level to those in 2022. Today, we're talking about the price for the 20th week at the level of $93 per tonne. As you take a look at the previously displayed slide, the summary of our operating results in the 4 split segments. These results are aligned to the results presented by me for the national electricity market. There was a generation drop by 9% vis-a-vis prior year, i.e. Q1 2022. That drop was especially observed in lignite generation as well as hard coal-based generation by 8%. This is obviously connected with the lower use of units by the supply operator. When it comes to natural gas, the generation increased by 32%, owing to the lower base in the comparable period. And this also stems from the fact that in the previous year, there was also a failure in the CHP Lublin. When it comes to Q1 2023, there was also a drop in the volume of electricity distributed. This is also connected with the use of energy. And on the other hand, mind you, that micro installations in households have been growing for many months. And as of the end of Q1 2023, there was an increase at 27% vis-a-vis the analogical period of the prior year. When it comes to the sales segments in Q1, we also observed a declining trend at the level of 3%. First of all, when it comes to the rates for corporate customers, which as I've been observing it in every conference have been diversifying their sources and using their own renewable energy sources. As I mentioned at the beginning, we had a decrease in heat sales by 5%, mostly owing to higher average temperatures. When we -- supposing we pass on now to the presentation of our financial results, well, first of all, there has been an increase in the margin for heat and energy by [ PLN 851 ], owing to the higher prices of energy sources. Well, that margin would have been even higher if we hadn't had an increase in the raw material prices. The prices for raw materials were higher by PLN 25 for hard coal per gigajoule and in the case of natural gas by PLN 55 per gigajoule. Well, you could say that the raw material prices are now dropping. However, we're talking about those raw materials that we secured last year, which means that we bought them at prices that were higher as compared to the prices that we can observe in the market these days. At the same time, you have to observe that CO2 emissions increased by PLN 151 on a year-on-year basis, PLN 151 per tonne. Also, the act of law, which limits the prices for 2023 at the level of PLN 693 per megawatt hour for households and PLN 785 for public utility entities and companies and corporations. So the write-down, the contributions to the Price Difference Payment Fund imposed on the generators and distributors represented PLN 2.317 billion, whereof a vast majority, almost PLN 2 billion was attributed to conventional generation. In Q1, we also observed higher increases owing to the regulated system increases at the level of PLN 600 million. In the period analyzed, we observed a lower result on the sales of electricity to end users. In terms of distribution at the level of PLN 500 million, which is, of course, connected with the limitation of the energy prices to allowable users and when it comes to tariff G. When it comes to costs, personnel costs at the level of PLN 256 million owing to social covenants. Thus, EBITDA increased by PLN 750 million. And the net result for the parent company was at the level of PLN 1.7 billion, which as mentioned by the CEO, has been attributed to the investment program pursued by the group in its entirety. If we take a look at CapEx, I won't be discussing it at length because the CEO has mentioned that already. As you can see, we've observed a year-on-year increase in CapEx at the level of PLN 628 million, i.e., 63% more, both in distribution, as well as in RES, as well as in district heating.

If you take a look at our debt. Debt in the first quarter 2023 stands at PLN 5.940 billion. Economically, it takes into account the future costs on CO2. And the debt-to-EBITDA ratio is 1.75x. Traditionally, I would like to wrap up by saying what our outlook for 2023 is. Here, we can see a major change on 2 items. One, regarding conventional energy, and that was due to the results of the first quarter 2023. We changed the outlook to stable. And as revenues from power and regulatory systemic services increased, we also made some adjustments. On conventional market, the revenues stand at about [ PLN 40 million ] and regulatory systemic services about PLN 580 million. The key impact on the results of 2023 will come from the law on extraordinary measures, which limits electrical energy prices, and on the other hand, introduces support to some recipients. As regards heat energy, here we expect growth because the published reference prices for heat will allow the heat generation segment to recover its costs carried over in the tariff, and as you know in view of legal procedures that was carried over for 2 years. Finally, that happened, that materialized in heat energy segment. Additionally, we also got support for cogeneration systems. As regards trade and renewable energy, in light of what I have said, that is bearing in mind the loss and price limitations, the outlook is negative, we expect a decline here. And as for distribution, traditionally a growing trend because of a high level of WACC, which allows us to complete the necessary investment program. And the only risk in distribution due to lower sales and lower energy consumption might be lower volumes of distributed energy. Thank you very much.

Thank you, Mr. President, that is what we prepared for our today's conference. Now we can move on to the Q&A session. We have also collected some questions that was sent by e-mail, and let me start with those questions. The first one, we can hear various opinions about the date of setting of coal assets. Can you see any risk for this process, for example, in the context of awaiting the decision of the European Commission?

Ladies and gentlemen, last Monday, Mr. Sasin at a press conference confirmed that in Poland, the process was practically agreed. The Ministry of State Assets, which is the host of this project, wants to be sure that the creation of the National Agency for Energy Security will not suffer as a result. It's going to be an arm's length transaction on stricter market conditions. So the ministry wants to make sure the commission sees the transaction in the same way. Hence, the awaiting the opinion of the commission, which is to support to confirm the situation. And that is the only thing that keeps us from setting up the whole thing.

Another question, to what extent does the lack of agreement with the Ministry of Climate on import of coal will affect finances of PGE?

Well, let me remind you, ladies and gentlemen, that by decision of the Prime Minister, Mateusz Morawiecki, we brought 10 million tonnes of coals through our PGE Paliwa company. 9 million tonnes out of those 10 million tonnes were delivered to customers, and for that, we got full payment. We also got compensation for the coal sold to municipalities. The thing that remains to be settled concerns several hundred thousand tonnes of coal that has not been sold yet. But at the same time, market is blocked, waiting for the final settlement to cover our costs. So we are waiting for the signing of the final agreement. This applies only to a small portion of the total volume that we brought as part of the decision of Prime Minister, Morawiecki, as part of this huge logistics operation that provided energy security and availability, common availability of coal in Poland in the winter season.

Thank you very much. One more question out of those that were e-mailed. Do you expect extension of the price freeze for 2024?

I will try to take this. Ladies and gentlemen, the decision regarding the freezing of the prices, just like the previous act of parliament were beyond any control of energy groups. So we do not have any control whatsoever on this -- you know that the geopolitical situation, which was disrupted by the conflict in Ukraine also disrupted market mechanisms. Those market mechanisms were then mitigated by introducing of this act of parliament intended above all to block the huge increase in prices for individual as well clients as well as for small and medium institutions. As the situation currently, in geopolitical terms regarding this conflict does not play such a huge role in the market. The market seems to be stabilizing slowly above all with regard to prices of commodities that are needed for energy generation. If the situation stabilizes and if market mechanisms that drive market prices stabilize, then I think it will be possible to come back to the situation from before the conflict in Ukraine. But let me reiterate again, the decisions are beyond the control of energy groups.

Thank you very much. Now I would like to invite those present in the room to ask questions.

[indiscernible] First of all, I'd like to ask you about your interpretation of what's going on in the wholesale market. The first phenomenon is the limitation of trade in the forward market and the prices on the spot market. Well the prices don't reflect the generation costs based on hard coal, we can see the right prices in tenders. And the third question, because the -- it's about the interpretation of what's going on, on the -- at -- in the wholesale market. And the next question is about your trade platform that has been launched. What's the volume of turnover? And one more question is about the funding of the offshore facilities. Have you been able to finalize anything, like conclude an agreement with a bank consortium to finalize the first stage of offshore wind farms? And one more question, do you have any information on what the notification relates to?

We don't. There is no notification period.

So what did MAP ask the commission? Because it was mentioned that it's not state aid and it didn't require that, state-owned entities just wanted to obtain a confirmation that their perception is the same that it's a market transaction, and this is not a process involving state aid, therefore, it does not require the notification. Just MAP, i.e., the Ministry of State Assets wants to be sure that the commission has the same position on that. Is there any -- are you aware of the debt level?

Well, I wouldn't like to talk about it at this moment because negotiations are underway. We're still finalizing the negotiations with banks. And as of today, we are leaving it in the negotiation process. Once the information is agreed on, you will be the first ones to know. There were also some questions. Well, first of all, let me relate to the funding of offshore wind farms. As you know, we've been doing it as part of project finance, and we've recognized the financial market worldwide. The interest in financial institutions is very large globally for these 2 projects as of today, we've gathered proposals that surpass the necessary amount to fund this project. So as of today, we have no concerns when it comes to funding the project. And as for the brokerage house platform, the brokerage house has [ 4 ] agreements in place with potential customers and has been involved in talks with another 2 customers. The talks are very much advanced. The total interest was expressed by 36 entities, and the brokerage house maintains ongoing contact with those 36 customers. Of course, in Q1 2023 after the abolition of the regulated market obligation, there was a 2-digit decrease for this kind of market and there is an increased interest in the spot market. As I mentioned, on the forward market, the prices are maintained at PLN 700 per megawatt hour, in the spot market, they are way lower, but mind you, what the volume of turnover is, it's also very low. On the other hand, let's take a look at the spot market from the point of view of CO2 emission ensuring not all entities have enough money to be able to contract energy. If Piotr would like to add anything to the spot market?

I believe that the CFO has mentioned everything that was important. If you have any specific questions, I'll be glad to take them. I mean, not all energy groups. I understand that you have the -- have enough money to trade in the CO2, maybe you don't have it, like it's been mentioned, it's not about money. It's about the limits for forward transactions.

Yes, because I said that on the spot, we contract both energy and CO2, whereas in the forward market, as mentioned by Piotr, we have to have limits and those limits for various financial institutions are available at the moment when April, March have passed because that's the normal cycle of payment for CO2 and then the limits get unblocked and then we can launch forward market contracting again. So the entire CO2 process is thus disturbed, and we have to pass on to the spot market. Thank you very much. Yes, please.

Piotr Dzieciolowski from Citibank Brokerage House. I have 3 questions about NABE. Why after 3 or 4 years of discussion, it's a question of asking the -- for the European Union's -- European Commission's position? And what will happen if the commission has a different opinion? And thirdly, is it important from the Board's point of view when it comes to the electoral process in Poland with regard to the NABE transaction? Would -- do you think it would be possible to perform this -- the split just before the elections?

Okay. So first of all, we're not talking about 3 years, we're talking about 2 years. When it comes to the European Commission, even if we quote the example from the Polish market in PGG, there has been -- there have been similar problems and questions asked of the European Commission. I'm sure that the questions get asked of the commission, but we keep saying that this is a market-based arm's length transaction. And if it's an arm's length transaction and any documentation on that has been presented to the European Commission, we expect that the response from the commission will be positive. Well, I wouldn't connect it with the political calendar because it's a business transaction. Yes. You asked what would happen supposing NABE would be postponed, what would happen to PGE? Well, nothing, because PGE had huge revenues based on hard coal, coal-based generation. Well, I don't need to persuade you because that would be precinct to acquire. It's necessary for the Polish generation market. Well, if NABE did not arise, then the revenues would be streamed towards PGE, but it's necessary that NABE is formed. We're not assuming that it wouldn't. The government is fully convinced that this process has to be finalized the electoral calendar is hopefully motivating people to do so, because we're also working on a 4-year -- based on 4-year terms. I wish that this transaction was finalized before the elections because the post electoral period is never certain when it comes to the results of the polls. However, supposing even some adjustments should arise after the periods -- after the election. NABE, it's a project under the hospices of the Ministry of State Assets and the Deputy Prime Minister, Sasin. We've heard no signals from the current opposition that NABE is a bad project. It's actually indispensable. No one questions that. And supposing even some changes rose, I don't assume so, because I believe that the Polish society will confirm that the direction adopted by the state and by us as state-owned companies and PGE, when it comes to energy transformation, that it will be confirmed on October 15. I'm convinced that the project will be closed by then. So I'm looking at it from the capital markets point of view, which is very sensitive to any information. You believe that the whole shift does not stem from any hesitations or your concerns, it stems from technical components and procedural issues. Yes, I'm sharing it with full responsibility. And as you know it, I've been responsible in sharing information. I don't promise to you [indiscernible]. It's -- we are determined to perform this transaction. It's necessary. I'd remind you that this is the largest project since the ownership transformation because it will be the establishment of the largest power generation entity out of all the groups, because there was PGE in 2007, there was a major consolidation in the market. That's when PGE was formed also during the role of the United Right. Let me reiterate that the United Right has the boldness to run ambitious projects. And this is even broader because it concerns various energy groups and the transformation of the whole market. It's not a simple entity combination. We bought PKP Energetyka EF and there was some less visible work that is performed to integrate the entities acquired. So it's easier to acquire to buy and to integrate. However, this is a major operation for the entire market. So let me assure you that everyone is determined to perform that. It's the #1 item on the agenda for us for the energy sector, and I'm happy that our colleagues from other groups are also determined to conclude that. They also see it's indispensable to make sure that the Polish power generation system keeps existing because otherwise, the profitability would be questioned, when it comes to the coal-based assets in its portfolio.

[indiscernible] I would like to come back to the offshore wind energy. You talked about the Siemens Gamesa contract. And you said that it would account for about 40% of your CapEx in terms of those [indiscernible] those 2 farms. What are your estimates as to expenditures on per 1 megawatt in this project? Is there CapEx inflation related to the global situation or not?