TAURON Polska Energia S.A. (TPE) Earnings Call Transcript & Summary

Good afternoon, ladies and gentlemen. I'd like to welcome you to the video conference call for the Analyst Earnings Call for TAURON Group for First 9 Months of this Year. The host of this meeting will be Mr. Marek Wadowski, the CFO of TAURON Group Management. And for questions and answers, we will have experts available, Mr. Dariusz Niemiec, the President and the CEO of TAURON Wytwarzanie, TAURON Generation, who is remotely available to us; Mr. Roland Makiela, Executive Director for Controlling efforts; and Mr. [indiscernible], the Manager of Market Analysis team. My name is Pawel Gaworzynski, I'm representing the Investor Relations team. Let me remind you that the -- our broadcast system is simultaneously interpreted to English, and let me emphasize that you can ask questions only via a form available on the broadcast website. So I'd like to invite you to ask questions via the form available on the website. And the final piece of information, technically due to the data protection regulations, we will not be providing your contact details or your details of the persons asking questions.

Welcome, ladies and gentlemen. Let me move on to the presentation for the first 9 months of this year. On the first slide, we are showing you the key data for the first 9 months of 2020, of course, as compared to last year. What's worth noting is the fact that our EBITDA went up 8%, sales revenue went up by 6%. In terms of operating data, one may say that the entire 9 months in our TAURON Capital Group was marked by the pandemic, by -- was marked by the facts of the pandemic on the economy, the distribution, the volume of electricity distributed fell 5%, electricity production by hard coal-fired units went down by 22%. But we also had some positive development such as the increase of electricity generation from renewable energy sources by more than 40% and an increase of commercial coal production by more than 20%. On the next slide, you can see the earnings for Q3 alone, here the situation is that it's similar for the entire 9 months. One should also note here that Q3 is better versus Q2 and as a matter of fact also versus the entire 9 months of this year. You can see, when you look at the volume of electricity distributed, where the volume dropped 2%, so one may say in Q3, the volume of electricity distributed has practically rebounded. In Q3, we were dealing with a significant increase of production of coal by 60%, and retail -- and electricity generation from renewables by almost 40%. On the next slide, you can see the most important event, the highlight of 2020. I will not be getting into details of each of them. I'd like to draw your attention to such highlights as the commissioning of 910-megawatt power generating unit in Jaworzno, our last -- our final coal investment project; also commissioning of Stalowa Wola CCGT unit; obtaining PLN 2 billion to finance the Group's operations in 2020; and also as we informed you, when we were acquiring this financing, this financing is to be used -- is intended for use, for our Green Turn of TAURON strategy implementations. Moving on to the macroeconomic data, as I mentioned, the economic effects of the pandemic had a very major impact on TAURON Group. We can see here in Q2, a significant decline of GDP growth rate. In Q3, we saw some rebound in terms of -- in terms of production sold. You can see the situation was very similar. Please note, clear increase of the sentiment among the businessmen -- business people in the period under review, the consumption was dropped by 4%, production fell 6.6%, imports went up by almost 40%. If you look at the structure of domestic production, what's important is the decline of electricity production from hard coal-fired and lignite-fired units. When you look at the basic financial data, key financial data for the first 9 months of this year is of course, the sales revenue. The sales revenue went up to almost PLN 15 billion. It was a consequence primarily of the electricity price, sales price, larger volume of electricity sold in the -- on the wholesale market and higher revenue from the system service. I mean here, the intervention -- coal intervention reserve service. When you compare the net profit in the period under review, we can see a clear decline of result in 2020. However, this is the consequence of an event that we informed you about when we presented the H1 results, first half results, which was the write-down of assets carrying value which was due to reclassifying TAURON Cieplo subsidiary into discontinued operations, so the assets held for sale, in fact. EBITDA comparable after excluding one-offs was practically flat. I'd like to draw your attention to one one-off event, which had an important impact upon the improvement of EBITDA in the period under review, namely the dissolving of provisions for the equivalent payment for electricity in the total amount for the entire group, PLN 533 million. In Q3 alone, the comparable results were similar, although we can see a significant improvement of EBITDA by 27%. Further on the presentation, we will present to you elaborate on the reasons for this improvement. Summing up the results of our individual segments for the first 9 months of this year, one should note that invariably the Distribution Segment is very important which in the first 9 months of 2020 contributed more than 70% of our Group's EBITDA. And also still significant is the renewables under this segment, which generated PLN 217 million in EBITDA during the period. In Q3 alone, the similar -- situation is quite similar. When you look at EBITDA for the first 9 months of this year and when you look and try to identify which segments we reported an increase of EBITDA, first of all you should point out the Distribution Segment, the Mining Segment and the Supply Segment. Negative impact came from the Generation Segment and I'll -- we'll also elaborate on the reasons for this situation. In Q3 alone, positive impact came from the Supply, the Mining and the Distribution Segments whereas the Renewable Energy Resources Segment and Generation had a negative impact upon our EBITDA in Q3 alone. Now let's move on to our largest segment, the Distribution Segment. Why it had a positive impact upon our earnings? First of all, one should point out a one-off event that I mentioned before, namely the dissolving of the provision for the equivalent payment for electricity. In the Distribution Segment, the impact of this -- the positive impact of this event on EBITDA is PLN 425 million. I indicated PLN 537 million for the entire Capital Group. And the second very important factor, namely the price of distribution services sales. In this respect 2 things that are important. The first one is the fact that the tariff -- the distribution tariff in 2019 was approved only starting from April 6. So during the first quarter of 2019, the tariff was lower. Therefore basically we have higher rates for distribution services in 2020, as compared to 2019. The second factor is very important as well, namely the structure of electricity distributed has changed, more of the electricity distributed we sell now in the household segment, while we sell less, we deliver less electricity in the industrial and SME segment. Although in Q3 alone, you can see that especially the SME segment is not reporting such large declines as we saw in Q2 alone. Also due to the change of the structure, that was also the reason for the increase of rate for the distribution services rate and that's why we have an important impact on -- upon the EBITDA. The structure which we're speaking, the change of structure of electricity distributed had a positive impact among the EBITDA in this period, looking at Q3 alone. Also you can see the impact of the development of the phenomenon, we don't have tariffs impact, which was approved a bit later in the -- not here, say price of the distribution service, the change of the average price is the change of the structure of the volume of electricity distributed. Now ladies and gentlemen, when you look forward, the future of the Distribution Segment, the quality component is very important. Let me remind you that the President of Energy Regulatory Office takes into account the quality parameters that we are presenting to you on this slide, and this quality parameter is very important for the future tariffs. We can see clearly that the quality parameters that the Distribution Segment -- that are characteristic for Distribution Segment are at -- are within the range acceptable by the President of the Energy Regulatory Office. We don't see any threat for the future tariffs. So we will not have our tariff lowered because we don't -- we are in those -- within the quality range. Moving on to the next segment is the Renewable Energy Segment. The segment we're presenting separately only starting from this year. First of all, you need to pay attention to a one-off event, as we showed the negative impact of RES segment EBITDA in Q3 alone. This is due to the fact that you can see what you can see here, the recognition in 2019, the booking in 2019 of positive result on the opportunistic purchase of the asset. Generally, we speak about the comparison of the price that we paid for the assets acquired and the value of these assets listed in the -- on the balance sheet. The total impact of PLN 620 million, which, it's a one-off event that occurred in Q3 alone. Of course, when we compare year-over-year renewable segment, we also take that event into the account, but it will not be recurring in the subsequent period. So that's why we have this impact of the segment on EBITDA on the earnings of Q3 alone. Generally, if we disregarded this event, the EBITDA in this segment would have been higher. First of all, due to the higher volume of electricity produced, as you can see at the bottom, what's the electricity production in volume inside our towers. In terms of water situation, hydrological situation was difficult in first quarter, later the situation improved -- much improved in hydrological situation. Wind conditions are good. One may say as compared to the previous year for the entire period, it was a good situation, favorable situation. A positive impact we can see from the -- in terms of the property rights, prices -- prices of property rights in the period under review went up. And as I mentioned Q3 alone, you can see a very clear impact of this one-off event. So that's why this strong impact upon the Group's EBITDA. But this will no longer be recurring -- recurring event. Here the increase of production is smaller, it did occur but it's smaller than in -- if you go back to the full first 9 months, due to the fact that wind farm that we acquired last year, we acquired beginning of September. So we are including them for the entire Q4 and part of the Q3 in our production. But during the first part of the year, those wind farms, the production from those wind farm did not occur in TAURON Group in 2019. Moving on to the Generation Segment, here we are dealing with the one-off event here that you should note, namely, we're talking about the swap of CO2 emission allowances purchase contracts where we are showing PLN 214 million in total. Our approach was different in 2020 with respect to the hedging of CO2 emission allowances rights. Our approach was different, in such way that we departed from the directly -- direct exchange contract and we moved to the contracts directly made with the financial -- that -- we did so that we sold the hedging -- our hedges for the CO2 emission allowance, at the same time we hedged ourselves with respect to the ASO regulation, directly with the financial institutions. Because of that, due to the price differences we -- it's showing PLN 126 million of loss because of the price differences. But this negative result will be accounted for in 2020-2021 roughly in such way that half of that will be accounted for in this year and half of it will be accounted for into next year. We are showing here then in the first 9 months this PLN 214 million, this negative result will be systematically getting smaller. An important element was an impact upon the EBITDA in the segment was the margin on electricity. Here we can see clearly that the market does not reflect the increase of the prices of the CO2 emission allowances fully. The increase of CO2 emission allowances prices had an impact upon purchase prices, but it is not fully reflected into this price. In our case, if we compare, the average price for the first 9 months of 2020 and the first 9 months of 2019, basically the average price obtained by this segment is flat, is at the same level. The cost of purchasing the CO2 emission allowances, practically the cost of retiring those CO2 emission allowances on -- per 1 megawatt hour in 2019 was in the region of PLN 60, in 2020 is the order of PLN 90. So a 50% increase. This demonstrates the scale of this development in this segment. This is the main reason for the negative impact of the margin on electricity on this segment. Here on the other hand, the positive developments include definitely much better production from the Lagisza unit, 460-megawatt unit in Lagisza was much -- the availability was much higher this year than last year, so therefore the much larger production, 1.3 terawatt hours more, which had a positive impact. Nevertheless, the increase of cost of retiring the CO2 emission allowances had a total negative impact. In terms of a biomass fired unit, the situation is better in the period under review, mainly due to the smaller, but still a decrease of the prices -- biomass prices and what I mentioned before, a higher price of certificates of origin of electricity. In Q3 alone, the situation is similar here, also we are dealing with a very substantial increase of the cost of CO2 emission allowances, in Q3 alone was PLN 108 per megawatt hour. So we can see clearly, that this is a very important cost element, that's such a strong impact of the margin of electricity on the result of the segment. And ladies and gentlemen, now let's move on to the discontinued operations. The discontinued operations is TAURON Cieplo, TAURON Heat subsidiary, it is being presented here in such way due to the fact, but at this point in time, we are conducting negotiations with Polish Oil and Gas company, PGNiG company, regarding the sale of this company. Exclusive -- we have exclusive negotiations until the end of November and due to accounting -- International Accounting Standards, we are presenting this subsidiary as a subsidiary held for sale. So this for TAURON Group, it's called discontinued operations. But of course this -- these operations are conducted normally, as it is usually done. In the first 9 months of this year, we can see a decline of EBITDA of TAURON Heat subsidiary. This was due first of all to the weather conditions. It's clear that such companies as TAURON Heat, weather is a very important factor. We are dealing, one can say, with a historic lack of winter in 2019-2020 on the turn of the year. That's why the situation in this segment is as it is. Here, we have seen a slight improvement of EBITDA due to the higher production from biomass, as mentioned before, in Q3 alone, also higher production from biomass via the units, improved the earnings, the result is a bit slightly negative. But one must remember that Q3 for the heat companies is not the best time of year. In the Supply Segment, so -- first of all you should pay attention. You should note the repurchasing, buying back of electricity from 900 megawatt units in Jaworzno, to a lesser degree from Stalowa Wola unit, here due to the fact that these units were not operating for the first 9 months of this year, we are buying back the electricity that we had sold before. The market situation had a positive impact upon the results of those transactions. The total positive impact was more than PLN 300 million. Nevertheless, this is, one may say, something that we consider as something that we will hold up for the -- in a longer term because that was only due to the good market situation. That's why we got good result of -- here. If electricity prices went up, the result would have been much worse on this operation of the transaction. Of course -- therefore, a very positive development is now commissioning of 900-megawatt units in Jaworzno and the Stalowa Wola unit. In terms of the property rights in Supply Segment, the impact of increase of the prices, this is reverse than -- as then in case of the previous segment discussed, so RES, renewables, the heat and the generation. Due to increase of [indiscernible] electricity, the EBITDA was lower. And now ladies and gentlemen, looking at Q3 alone here, as a matter of fact, the most important aspect is this. Our transactions related to the repurchasing of electricity on the market. The total impact being more than PLN 60 million, however in the supply segment in Q3 alone, one should also note the fact that we received the decision with respect to equalizing to the compensations of final reconciliation of settlement of compensations related to adjusted prices in 2019, and this had positive impact upon the EBITDA in this segment. The price of property right that I mentioned before had a negative impact on the earnings in this segment. And ladies and gentlemen, now let's move on to the last segment that we are presenting, Mining Segment. Here, definitely a very positive impact came from the increase of production, both in first 9 months of this year as well as in Q3 alone. This had a positive impact upon the earnings. Nevertheless, the increase of production was -- came at such point was due to the fact that I mentioned before. Due to the pandemic, there was a major drop of demand for this coal. It was partly, of course, related to the lower production of electricity by the hard coal-fired units, but also was related to the warm winter, which hold the weather impact upon the demand for coal. So the coincidence of those factors led to the situation where a large portion of that may -- a larger production went into inventory, went to stock and pricing have production in inventory, leads to -- not showing the cost of production in the P&L statement but only in the balance sheet. But due to the comment -- the relationship between cost and revenue, we are showing this on this other. Here, this is first of all, the impact of increase in the inventory levels. The Mining Segment is working very hard on improving its efficiency of its operations, one of the elements of that was the obtaining of financing under the anti-crisis shield in the amount of PLN 47 million for the total 9 months. This was related to the reduction of wages, shortening of working time, and we'd like to thank very much the workforce here for their constructive approach to this issue. Let me add that the Generation Segment also conducted such an operation. Also with respect to the Generation Segment, I would like to thank the workforce for going along with this operation. Thanks to that, the EBITDA was more than PLN 16 million for the TAURON Capital Group, in total higher. As you can see here, the result is much better. Let me just say that for the entire year -- for the full year, we expect a better result in the Mining Segment. Nevertheless, due to the fact that will be the scheduled retoolings of longwall coal faces, the intensity of those retoolings that are planned reinforcement, that are planned in Q4, which will lead to the deduction of the production output. So one must be aware of the fact that in Q4 alone, the results will not be a positive result, but definitely nothing else happens, they should be better than in 2019. In Q3 alone, a very important factor that had an impact upon the improvement of the result here, the inventories were not going up so much versus 2019 was the higher -- we've a higher sales of coal. This was primarily related to 2 factors; one factor being, of course, the intense work on selling more large lump coal and medium-size coal -- lump coal, everything that we sell outside of the utility sector. May be in ton -- in tonnage terms it's not very impressive, but has a very important impact upon the earnings of that segment. And also higher sales related to the commissioning, not yet fully putting into the operation, but commissioning of 910-megawatt unit in Jaworzno. Ladies and gentlemen, now let me say a few words about the situation with respect to the debt and financing. The net debt to EBITDA ratio at the end of September is 2.53x. It was the ratio level that was fairly safe. The total amount of financing available end of September 30 is PLN 3.5 billion. After the end of September, we acquired another PLN 1 billion in additional financing that we -- this -- informed you about this before. So one may say that in terms of financing, the situation of our Group is stable. In the coming year 2021, we don't have a very -- not have to repay large financing. The first big repayments comes in 2022, and on an ongoing basis, we'll be working on our structure of our financing, so the situation could continue to be stable and safe. Moving on now ladies and gentlemen to the key projects, investment projects. One may say that, from this table 3, projects have been completed, namely the construction of the generating unit in Jaworzno and Stalowa Wola. And implementing heat production at the 460-megawatt unit at Lagisza power plant. At the very beginning, we showed you a 5% increase of the heat production Group wide, which is a bit contrary to what I said before that winter -- mild winter meant that you need -- less heat was needed, but this 5% increase was due to the implementing heat production at Lagisza power plant and the 3 projects listed here are practically over. Out of those products that we showed you, only one, the one that is made up of smaller projects, adaptation of TAURON generations -- generating units to the BAT conclusions. This project will be completed next year, will be finished next year, due to the fact that new BAT conclusions come into force as of middle of August. Ladies and gentlemen, the last slide of our presentation. The structure of our investment -- capital expenditures -- of our CapEx. Invariably, the distribution is a major portion of our CapEx. You can see clearly that it's a very important element. Also generation, but the generation should -- in the future period should have -- its CapEx should be lower due to the fact that we have commissioned the units that I already mentioned, and so pointed out on the previous slide. And now ladies and gentlemen, that's all from me regarding the presentation. Now I'd like to hand over the floor to you, but more so to Pawel, who is the moderator here. He'll be reading your questions.

Thank you very much, Mr. President, for your presentation. Number of questions came in from investors and analysts. The first questions are related to the Supply Segment. Why such a good result in the Supply Segment? Why isn't the company adjusting the EBITDA, taking into account numerous one-off events in total of PLN 135 million?

As I mentioned before, the earnings of the Supply Segment, a very good earnings, a good result of the -- Supply Segment is primarily the effect of repurchases of electricity, and basically one may say that this is practically a one-off event, but not quite, because as a matter of fact it's normal operations, but this will not occur anymore next year. The total impact of those purchases, those buybacks for the entire 9 months is the amount of more than PLN 300 million. Is it to worth -- would it be worth to make adjustments, a matter of representation, if you would prefer that -- for us to show with more transparently, we could do that, but each time, of course we indicated, we note what is the impact of those one-off events on the results. So we're trying to provide you the best information we can possible.

Thank you very much. Mr. President mentioned about the impact of buybacks -- electricity buybacks on the first 9 months result. One of the analysts asked the question about the impact of the buybacks -- electricity buybacks on the earnings in Q3.

In Q3 alone it was 63 -- more than PLN 60 million. That was the impact.

Thank you very much. Next question is related to coal segment. The company mentioned about setting aside -- spinning off the segments, the coal segment out of its structure. Can you give more details? Can -- when are you planning to complete the work on spinning off the coal mines?

According to the agreement concluded in September, the workforce of the Polish Mining Group, PGG, by December 15th, the agreement with the workforce should be concluded to the -- regarding the entire mining sector. Of course, here it means that such an agreement should also include TAURON mining subsidiary. As of today, we don't know any more details. The works are continued on these documents. TAURON mining subsidiary setup 3 teams that are working on the components or concept that could be taken into account here when negotiating this agreement. It is difficult for me to say anything more about it. But I think soon we'll find out how this will be resolved. Let me put it this way. Definitely, TAURON mining, TAURON Dystrybucja is the part of entire mining segment in Poland. And we would really like our subsidiary to be taken into account in those agreements because any changes to -- regarding our coal mines will have an impact upon TAURON mining subsidiaries.

Thank you very much. More questions regarding the Mining Segment. This time, the question is about the expected coal production in Q4 this year and the outlook for the entire 2020 and next year 2021, regarding the coal production volume.

Well, let me put it this way. We are expecting that full 2020, total production of coal will be in the region of 4.4 million tons, 4.5 million tons. I don't remember the level, but level for Q4 alone, you will have to subtract the production for -- in the first 3 quarters, whereas in 2021, we expect again increase of extraction output volume to reach 5 million tons. As I said, Q4 will be weak because of significant coinciding of retooling works, reinforcing works on the longwall coal face, but the outcome of that should be higher production in 2021.

Thank you very much. Next one, the same questions again. So I will not repeat it. The next question is related to the capacity market. Do you see any reasons for the capacity market to be suspended and then subsequently significant change next year?

Of course, ladies and gentlemen, everyone has, in the back of their minds, the issue of [indiscernible] and the potential risk related to the suspension of a capacity market, which took place a few years back in Great Britain. But our view is as follows. First of all, the capacity market in Poland was designed in such a way in order to take into account whatever happen in Great Britain. So in our opinion, the risk that the situation in Poland will be similar to the British situation where the capacity market was suspended for 11 months, in our opinion, this risk is low. We expect that next year, the capacity market will be operating without any disruptions and the capacity contracts will be implemented, and that's how we view it and prepare ourselves as a Group. Therefore we are adapting the -- our generating unit to the -- about conclusions, about requirements and we will make -- we are making sure that the units are dispatchable, mainly to that degree due to the capacity markets.