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

Good morning, ladies and gentlemen. During the conference of media investors and the analysts on the earnings of TAURON Capital Group for Q1 2024. Let me, ladies and gentlemen, introduce our Managing Board. We have a full -- all members present here, President, Grzegorz Lot; the Vice President, Piotr Golebiowski, responsible for Trading; Michal Orlowski, responsible for Asset Management Development; as well as President, Surma, responsible for Finance. On my right-hand side, we have [indiscernible], responsible for Investor Relations at TAURON. My name is Lukasz Zimnoch, I'm a press spokesman, and I'll be conducting today's conference. Ladies and gentlemen, traditionally, let me inform you that the presentation is conducted in Polish with a simultaneous interpreting into English outside of broadcast, so you can also listen in to today's meeting via the teleconference mode. Let me invite you now already to ask questions using the form available on the broadcast website. The first questions have already arrived. Traditionally, to start with, let me hand over the floor to the President of Management Board, Mr. Grzegorz Lot.

Good morning. Just as Lukasz mentioned, Grzegorz Lot is my name. I'm the president of Management Board of TAURON Polska Energia, TAURON Group. Ladies and gentlemen, we promise that we would always be at your service and the service of investors, shareholders and media. So here, we are all here online this time, but thanks to that, we are minimizing the CO2 emissions, and that's one of the strategic objectives that we as a company are trying to promote not only for ourselves but also for customers. The feedback we received from the last conference was as follows: shorter and more to the point. So therefore, let me hand over floor to my colleague, Krzysztof, please.

Good morning, ladies and gentlemen, let me present the key financial data and moving to the key aspects. So we have revenue in Q1 this year, dropped significantly year-over-year. However, that was impacted, first of all, by the decline of electricity prices on the Polish Power Exchange and the lower volume of electricity sold. Regarding the EBITDA, we generated slightly more than PLN 1.5 billion of EBITDA this quarter. More broadly, I will be talking about EBITDA further during this presentation. Net profit of first quarter topped PLN 0.5 billion. Regarding CapEx, it went up year-over-year by close to 10%. The main reason for the growth being the increase of spending in the distribution and in the renewables. More broadly about the CapEx, Michal Orlowski will speak about CapEx further on the presentation. Net debt-to-EBITDA ratio as compared to Q1 2023, it have -- it has come down significantly. This drop is one that was impacted by 2 factors. First of all, rolling EBITDA year-over-year was significantly higher. Let us remember that we are presenting here the Q1 EBITDA whereas EBITDA ratio includes rolling EBITDA for 4 quarters in a row. And a significant impact also was caused by the decline of net debt. I will expand on that later on in the presentation. Regarding the operating data and Distribution segment, we had practically -- volume of electricity distributed almost flat versus Q1 last year regarding the renewables production, a slight increase as I remember above previous quarter and this quarter were very good in this area in this line of business, we are talking about the hydrological conditions as well as the wind conditions. Significant decline quarter-over-quarter took place in case of conventional units electricity generation. We had a big 20% decline, the reasons for this decline will be partly presented during the slide -- on the slide presented by Mr. Piotr Golebiowski, and partly, I will elaborate on them when I've been presenting the slides related to the generation line of business. Regarding heat, we had a quite stable result year-over-year. We had a bit higher temperatures -- outdoor temperatures this year in the heating season in Q1 this year, so a slightly lower production of heat, and we had observed a significant decline of electricity sold, mainly to the business customers. That's all regarding the key data that we hold over the floor. Now to Piotr Golebiowski, who will present the situation on the market, and I will get back to you continuing presentation of financial results.

Good morning, ladies and gentlemen. Briefly, the characteristics of market indices after Q1. First of all, what I already indicated during the earnings conference for the full year 2023, we are dealing after a strong destabilization of prices in 2022, 2023, as a result, among others, the innovation of Russian Federation on -- against Ukraine. Now we're dealing with a stabilization of demand and supply situation, All the indices either returned to the normal levels or in an upward -- downward trend, excuse me. This is applicable to indices related to SPOT prices of electricity, futures market of the COT prices and coal prices. Let me go one by one. Let's start with the SPOT market electricity prices because when we get into this year, we are talking on the contracting -- [ entire ] contracting either on short-term market, shorter futures market or on the SPOT market. And now this decline of prices on the next day -- day ahead market, we -- for expected bad, it was about 42% below the level of 2023 -- of Q1 2023, mainly this is due, first of all, to the cheap gas. So we are dealing with 3 factors that are behind that. Big -- a very big drop of prices on the gas market, which led also in the laboring countries, which led to the imports of electricity and increase of imports to Poland in Q1 by at least 70% more than in the same period of last year. Also a strong growth of electricity generation from renewables, which in Q1 was about 38% higher than last year. Regarding the photovoltaic installations and that's -- photovoltaic and 20% regarding wind farms. The same is applicable to futures indices of a 2025 product contract is lower than the 2023 price of 2024 contract by about 26%. Moving on, the CO2 emission allowances prices significantly went down, which was even a drop below our expectations. The price was between EUR 52 and EUR 77, average clearing price came in slightly more than EUR 61 per tonne. And it's 31% lower versus the average price of a similar contract in Q1 2023. And now these events, these developments -- but just let me just mention the prices of coal, PSCMI1 index, the average post production cost of thermal coal in Q1 2024 came in at almost PLN 23 per gigajoule, and it was about PLN 9 lower than the level of prices in the first quarter of 2023. In the right-hand bottom corner, we are presenting maybe it's not intuitive, CDS, [indiscernible] index which is the difference between the market price of electricity and the cost -- the variable cost. And for some time, for the 200 type units, they are negative on average in Poland. This level is about minus PLN 100 per megawatt hour on average. Whereas for 1,000 type units, we estimate that we have leveraged about minus PLN 20 per megawatt hour, and this is the reason why the contracting of electricity in 2024 -- for the year 2024 will be very limited. That's the index that shows why the utilities, the energy groups, including us, are hedging our result of trading operations ahead of time on the futures market to avoid this type of situation, but the economics of the production could turn out to be very limited due to the short-term changes of price indices. That's all for me as of now.

Let me go back to the discussion of the financial results of the group for Q1. Of course, if we look at the reported EBITDA quarter-over-quarter, so Q1 '23 versus Q1 '24, we can see a significant decline of EBITDA. However, here, we love to demonstrate that this decline of EBITDA is caused by a number of one-off events and if we adjust the EBITDA, stripping out the one-off events, then the EBITDA quarter-over-quarter would be very similar to be about PLN 1.7 billion. The key events with an impact upon such a big difference in very positive EBITDA, it's, first of all, something that we're also discussed in previous conferences is the revaluation of adjustment of volatile difference in the distribution line of business and this revaluation went in opposite direction in the 2 quarters [ we're discussing ] Q1 2023, this value variation was more than PLN 600 million, close to PLN 700 million, while -- and it resulted in a significant increase of EBITDA at that time for that period because remember that it's a noncash, nonmonetary event. And this is due to the change of the price because of the grid losses between December and January of a given year, and last year, this effect was started when the price was going up. So the effect of this value variation was positive. This year is, of course, -- it's not [indiscernible], but this year, the price -- as we turnover 2024, the price of electricity purchases for grid loses was declining. Therefore, this revaluation effect has a negative impact. So these 2 factors were the main factors determining the difference quarter-over-quarter. Also last year, we had another impact from payout funds -- charge of the payout fund, this year was not longer inforce. So we don't have this one-off event related to the allowance of price difference payout funds. Regarding the events that took place in Q1 2023 ended Q1 2024 is the issue of PLN getting stronger. Let us remember that integration, we are setting up the provisions for CO2 emission allowances, this provision and the operational level is converted versus the euro exchange rate. The strengthening of PLN leads to the decline of the level of those provisions or inventory improvement of the operating results, but had a major -- that reverses itself at a level of the financial results, other one-off events that took place in both quarters. In 2023, we were releasing a part of onerous contract provisions that were set up at the end of 2022. While in 2024 in Q1, we're dealing with a positive impact. We got a positive interpretation from the tax office regarding the tax treatment of the payout of a method to apply to calculate and take in account VAT or lack of VAT and the payment that was introduced in the reduction of charge to the customers with famous PLN 125 that we set up a provision last year versus a net amount of provision after interpretation of a tax office, we can treat it as a gross amount, therefore, a part of the provision that we set up applicable to tax obligation was released in Q1 2024, having adjusted EBITDA -- having stripped out all those events, the EBITDA is practically flat, it's comparable. If you look at the comparison of EBITDA between quarters per segment, individual segments. Here again, distribution, of course, is a key segment for the group. The difference in the contribution between quarters due to this one-off event, as I mentioned, the reported EBITDA is a bit distorted in the first quarter due to the one-off impact of revaluation of the balancing difference. It's also worth emphasizing the good results of all of the segments both at the EBITDA level as well as at the EBIT level, all the results are positive. The supply segment is particularly looking good. But remember, we're also dealing with this one-off events regarding the positive interpretation regarding the taxes. Now moving on to in detail into individual segments regarding the Distribution segment, as I mentioned at the beginning, volume of electricity distribution is very similar quarter-over-quarter, practically flat. And the difference -- the negative difference can be seen in Group A, but that is customers a bit lower consumption by the steelmaking industry and mining industry. But basically, the volume of electricity distribution is pretty flat quarter-over-quarter. The negative impact on the quarter-over-quarter results comes from those one-off events that I mentioned before, so the revaluation of balancing difference. And this had an impact at the level of more than PLN 1 billion negative, but more than PLN 600 million of a positive impact in Q1 2023 and almost PLN 400 of negative balancing difference in Q1 2024. From the recurring more kind of business point of view, we have a positive impact of margin on the distribution service. Here one could probably mention 2 or 3 factors that were behind it. First of all, the increase of WACC year-over-year, by almost 2 percentage points, it went up. So it had a positive impact upon our earnings, the results of the Distribution segment. The second factor, we are dealing a bit lower grid losses. And the third factor is an increase of reactive energy, the passive energy, that had a positive impact upon results of distribution line of business. We're also dealing with positive event with respect to the regulatory account, the settlement on this account was lower this year, year-over-year. If we move on to -- regarding the key quality parameters in the Distribution segment, practically those parameters were fully met. We have a slight deviation regarding the new grid connection installation time. However, we're working on it, and we do believe that over the course of the year, those quality parameters set by the President of Energy Regulatory Office along with a certain tolerance that admitted will be made, and this way we'll not have a negative impact upon the tariff in the subsequent years. Moving on to the Renewables segment. Here, we are dealing, first of all, positive price impact. As I remember, last year, we had a law that introduced cap on [ adjusted ] prices in this segment to a certain level -- at a certain level. This year, this law is no longer in the force so we've positive impact on the price of electricity. At the same time, we have a negative effect coming from the price of green certificate. The price went down partly by half year-over-year. This will have a dramatic impact upon the results. In addition, one of the wind farms in our portfolio lost already the ability to take advantage of green certificate benefits. So about 15 years have passed since it was commissioned. If you look at the volumes, the volumes didn't have a major significant impact upon the results because they were pretty flat year-over-year. But just remember, the Q1 last year as well as Q1 of this year were very favorable regarding in terms of meteorological conditions, weather conditions. Moving on to the Generation segment here. This segment year-over-year reported a significant decline of EBITDA. This drop in EBITDA is, first of all, cost by the lower margin -- trading margin, Piotr was already showing it on the previous slide that practically on the 200 type units, it's not possible to generate a positive CDS regarding the [indiscernible] CDS. So the margin deteriorated year-over-year. We have a decline of electricity prices, which is much stronger than the decline of coal prices and the decline of CO2 emission allowances prices. Regarding -- and this is the key effect. The second effect that I mentioned at the very beginning, we had a negative impact upon this segment. There is the decline of the volume, 20% decline year-over-year. Here, we are dealing with the effect of coal unit being pushed out by growing renewable generation, gas prices falling significantly year-over-year, and we are higher in the net order versus especially the old 200-megawatt units. Regarding the other effects, we already mentioned this one-off event. As a matter of fact, the strengthening of Polish zloty, this effects year-over-year because we had -- we saw PLN strengthen in Q1 last year and Q1 this year. This effect year-over-year is another PLN 50 million, as I mentioned, the lower cost of provision for the CO2 emission allowances. Positive aspects of this segment, we can say we have a higher margin on heat here, the tariff in this area was changed in spring last year. So that means that in Q1 2023, where tariff was lower. Now we have a higher tariff in place and therefore, results in the headline of business are better year-over-year. Moving on to the Supply segment. Here, we are seeing significant improvement year-over-year. We have very good EBITDA and EBIT. The EBITDA was even better than Distribution segment in Q1 2024. However, Here, we have some positive information. As I mentioned, the one-off effect of release of provision due to the positive interpretation regarding the VAT and the provision set up for return -- refund of [ PLN 125 ] to the customers that made the applicable legal requirements and positive effect of the margin of electricity price, first of all, the favorable contracting of it is the last year, but was hedging with electricity for this year at the price -- at favorable prices. And secondly, we had a positive effect in such a way, but the full cost included are covered by G tariff due to these 2 effects mean -- due to these effects, we had an increase on the supply, but negative impact came from a decline of volume in the segment -- in the business segment customers, and year-over-year they make our results worse. So we have also a positive effect regarding the margin on the gas sales year-over-year, relatively these results are better, which doesn't mean that the idea is bad, they are much better. So one can say that the segment looks positive, but to that extent, the earnings in the segment was improved by this one-off events by more than PLN 100 million due to this taxation issue -- taxation effect. Moving on to the debt slide, one may say, but from a functional point of view, the situation of the group is stable. As of the end of the quarter, we had available close to PLN 4 billion available financing. Therefore, there's no liquidity risk regarding the repayment of debt coming due this year and the CapEx that we are implementing. But addressing some questions from the previous conference, again, first time on the slide, we showed you the move from the gross debt that you can read in the -- find in the final statements to the net debt that we calculated based on the agreements with the financial institutions. And the first thing is that -- I'm talking about the net debt year-over-year went down by PLN 1.7 billion. This is a positive effect, it does have a positive impact upon the leverage ratio, but I mentioned at the beginning of my presentation on the first slide, in combination of rolling EBITDA. But if you look at the bridge, regarding the gross debt to net debt, the 3 key elements have an impact [indiscernible] difference. One is quite obvious. But I'm talking about the analyst, I -- catching it very well, the matter of cash. The other 2 are more due to provisions of a financing agreement. It's a matter of eliminating the hybrid bonds or subordinated bonds. The characteristics allows them not to be included in the senior debt. So they reduce the net debt, that's what financial institution allow. And the second important thing is the leases we include in that the typical financial lease before the change of regulation. I remember now regarding the lease agreements, these are mainly the rights to perpetual use of land and taking into account the scale, [indiscernible] group, heat distribution, we are dealing here as a matter of fact, with long-term several dozen years terms of agreements are classified as lease agreements, which is not typical lease -- financial lease as was the case before the change of lease-related regulations. So we have an impact upon the definition of leases before the change of accounting regulation. So these 3 elements determine the level of net debt, but we are presenting and based on which we calculate the net debt-to-EBITDA ratio. That's all regarding the debt. Let me hand the floor over to President, Michal, who will discuss in detail the CapEx of our group.

Good morning, ladies and gentlemen. This is Michal Orlowski, Vice Chairman of Management Board for Asset Management and Development. Regarding the CapEx of TAURON Group, we have it increased by 9% year-over-year, up to PLN 847 million, and this increase is due to the increase of CapEx in Distribution here, [ PLN 70 million ] more, PLN 635 million spent this year, including 68%, so build venue connections, 68% for replacement and refurbishment of grid assets and PLN 55 million in the third largest category of AMIPlus program, so with smart metering installation. Regarding Renewables, here an increase by 32%, PLN 24 million year-over-year up and half of those outlays were spent on the PV Farms, [indiscernible] wind farms, refurbishment of the hydropower plants regarding -- and other spending. Regarding [ donation ] in decline of spending conventional from PLN 74 million to PLN 46 million. The biggest item is the Outlays at TAURON Wytwarzanie subsidiary, including the overhaul components and the refurbishments related to the 910-megawatt unit, [indiscernible]. In the other segment, it declined from PLN 57 million to PLN 41 million. The biggest part is the investment in IT, PLN 35 million and the lighting maintenance and expansion PLN 13 million this quarter. And on the next slide, I will describe the details of investments in the renewable energy sources regarding the farms that will be commissioned this year. So first of all, the wind farm Mierzyn, we have 92% work progress. And wind farm achieved capacity to generate electricity, electricity was put into the grid on April 11, tests have been completed by UDT, [indiscernible] office, acceptance has been completed, and the provision of wind farm commissioning is being -- is underway. The next farm is Warblewo. So electricity on the 14th of May was put into the grid, completing [ application ] phase. And now we are at the stage of testing and the preparation of a handover for operation. Gamów wind farm, the installation, beginning of April, 15 turbines was competed. Now we are doing the start-up where its acceptance works also being completed regarding the medium voltage line. The works are being completed at the main switching substation, [indiscernible] therefore, work progress is also pretty high. Regarding Nowa Brzeznica and Sieradz, Nowa Brzeznica certainly works related to substation conducted also foundations already have been completed for wind farms. At Sieradz, we had the design state at this point in time. And to answer one question right away, that's true. When the CapEx still -- you don't see the progress yet, namely the certain delay between -- certain lag between the work progress and the financial results. Therefore, in the subsequent quarters, we expect that this segment will be seeing an increase of CapEx. Is it going to be specifically in Q2 or in [indiscernible] it depends upon the logistics, but that we are showing 3 of those wind farms should be coming by the end of 2024, and relatively advanced [indiscernible] Q2 2025 -- Q4 2025. Regarding the PV farms here, Proszowek now is generating electricity. Practically, this is a project that, as of today, is practically completed as of time of financial statement, it was not ready yet. [ Balkan ] Postomino, we are a bit less advanced here. We have bulk of [indiscernible] the preparation of all the support systems, infrastructure, acceptance of petitions of applications and dealing with subcontractor, possibly mainly the design work, where can [indiscernible] and building [ setting the successes ] the access roads. So this is the work progress of Renewables product portfolio as of now. Thank you very much.

Ladies and gentlemen, the time has come to move on to the questions that were sent. Thank you very much. It seems that 1 month after full year conference, there'll be fewer questions, but we have quite a few of them. First question regarding the positive cash flow, especially after the assets have been spun off, the probability of first dividend before 2030 is realistic or much faster, much earlier?

As we said before, the ambition of the management board is to pay out the return to pay out of a dividend. It was mentioned here, the key issues the spinning off of coal assets, the precondition per requisite for the payout of the dividend. Of course, we are also dealing with an issue of availability of capital on the market. However, our ambition is to prepare the financial plans in such a way so the dividend could be paid out in the future. I cannot declare which year is going to occur because we're not fully sure when the coal assets will be spun off, we would like to take place next year at the latest, but that's been a determining factor. As I said, we'll be trying to design our future cash flows and our strategy in such ways, but also prepare for the shareholders, the dividend would be included.

The next question is Ministry of Finance, putting the brakes on the traction of a spin-off of coal assets. Is the ministry waiting for European Commissions permit for extra support [indiscernible] either capital markets or from contracts for different CFDs. Without this approval, can the Ministry stop the spin-off of the assets, which could [indiscernible] of the success of entire process.

Well, ladies and gentlemen, this is the question mainly should be directed to the Ministry of Finance. So please let me not answer this question because I'm not an employee of the Ministry of Finance. Regarding the question whether we are putting a break on the deal, definitely not. We are the company we never came across such situations. So second question, please direct this question to the Ministry of Finance. In case of putting the brakes on, it never happened. We didn't feel anything like that, is it somebody is putting any brakes on this deal versus our company.

The next question, assuming a stability of prices will result on the coal plants in [indiscernible] should be weaker versus Q1 due to the lack of positive effect of buyback. So in the second half of 2024 and 2025, should there be a positive effect on the cost of coal when the existing price stays at the similar level -- at the same level?

Let me answer -- try to answer. Let us remember, there are several issues in play here. Let's start with the segment. In our case, the Generation segment is a heat segment and the conventional electricity generation power plant. So let's look at those [indiscernible] segment in this context. Regarding the weaker Q1 and the prospects for the subsequent quarters. In the outlook for this year, we said that the Generation segment will be significantly lower versus the reported EBITDA last year. Here, we are upholding what we mentioned during the previous earnings call -- conference call, regarding the margins and the results generated. Because remember, we are dealing, first of all, with 2 factors here. First factor is the margin effect. The margin to large extent, has already been hedged for this year because we're talking here about the price of electricity, the price of carbon credits and the price of coal. And that's the first thing. The second thing is the volumes of electricity produced and forced the Generation that take place in this segment. For Generation, to that extent, don't -- I'm not up to power [indiscernible] national policy, Renewables production, gas-fired production, the decisions and at the end of the day, made [indiscernible] that take decisions to which units should operate. So I wouldn't assume a stable result quarter-over-quarter. I would uphold the outlook we had for this year. And as I mentioned discussing this quarter, the margin in this segment went down significantly year-over-year and fossil operations are also dropping. So the prospects are much weaker. We are talking about the share of coal and the positive effect from the cost of coal. Of course, we had a positive effect on cost of coal alone because the prices of coal went down significantly year-over-year, and we're expecting this trend to continue in 2025. However, the price of electricity went down much more than the price of coal, price of the capital credits went down. So margin worsened year-over-year.

Yes. The question was regarding the electricity buybacks in Q1 this year, the buybacks of electricity were higher than planned. So we're planning regarding the coal generation segment, we're planning about 7% of electricity buybacks versus volume that was sold. However, it was, in fact, 23%. So we assume that approximately 20% of -- will be electricity regarding coal or the other subject of buybacks or reductions. So that's what Krzysztof mentioned, this is an effect that we can additionally generate on the margin due to the buyback opportunity if this development where the price of electricity is lower than the variable cost of its production.

Next question for the Management Board, the outlook for the growth in Distribution regarded the decline of free cash flow versus the average from last year is active in spite of regulatory asset base going up and the higher WACC.

Let me answer this question. Generally, put this way, in Q1, as Krzysztof mentioned, we're dealing with the one-off events that had the major impact upon the Distribution segment. They were of non-cash nature. So with EBITDA, the actual cash flow in this segment in our opinion, Distribution, and I do hope in the opinion of investors is an attractive investment segment. It also has a certain need due to the growth of consumers and the need to upgrade the power grid to make it bidirectional. So at this level of WACC and the risk related to the investments in the Distribution segment, we have opinion this is one of the attractive directions of -- for investment in TAURON Group. So that's why the majority of funds allocated to it.

Segment question, was that also building one megawatt in the onshore wind farms? What is the reason for putting a break in some of the investments in wind farms in Q1 from Q2? One should expect for the rebound on spending on the product underway. How much is the cost of building 1 megawatts in the onshore wind farms?

It depends. It depends on a number of factors. Now we have a limited supply of new projects, development projects, these are mainly the projects that were developed for some time, long time of certain modifications. However, frequently, it is not the latest and the best available technology due to environmental reasons. There's [indiscernible] build on the [indiscernible] to meet the requirements, which also involves CapEx at a certain level. At wind farms, an important factor also the length of grid connection [ point investor of equity ] farms. At PV farms, we have a relatively minor difference between the onshore wind farms, the difference in participating locations is quite significant. Therefore, the price of those products differ significantly. [indiscernible] as we see now, these are low double-digit figures regarding prices in millions PLN per megawatt. But during the segment, we have quite a lot of variation. We had a decline over CapEx per unit as we can see in case of PV here, the prices are stable after they went up in the previous years. Regarding the spending, as I mentioned, the financial progress is not always reflected. Actual physical progress in the subsequent quarters, you can expect an increase of CapEx in this segment. What is going in the Q2 specifically, it depends upon the decision construction site to the contractors. So generally speaking, I would expect an increase of spending in renewables in the certain quarters.

[indiscernible], that's [ on conductor ] through the government and [indiscernible] assets regarding spinning off of coal assets. They started talking to other groups about it, for instance, PG or [indiscernible].

Thank you very much. Yes, of course, because I sort of talk as we declared during the content in our talks, we are preparing ourselves. There are no final decisions yet in place. However, as a company, we are ready to take such a step. We are having talks with the government. We are also communicating this to the workforce. So our vision, our strategy is unequivocally communicated. It doesn't mean that -- nothing else something could happen, we have it all in front of us, ahead of us talking to individual -- other individual groups. Well, each group has a different situation, different state, we are focusing on [indiscernible] specifics. We have a short production -- provision in production, very long provision in supply. So quite a different potential and the situation when in case of the other utilities. As we mentioned before, focusing on our group, developing, building value for our customers and our shareholders, we were looking for a solution for TAURON.