Half Year 2022 Polskie Gornictwo Naftowe i Gazownictwo SA Earnings Call Warsaw Aug 18, 2022 (Thomson StreetEvents) - Edited Transcript of Polskie Gornictwo Naftowe i Gazownictwo SA earnings conference call or presentation Thursday, August 18, 2022 at 7:00:00 am GMT TEXT version of Transcript =============================================== ================================= Corporate Participants =============== ================================================== =============== * Marcin Piechota Polskie Górnictwo Naftowe i Gazownictwo SA - Head of the IR Division * Przemyslaw Waclawski Polskie Górnictwo Naftowe i Gazownictwo SA - VP of Finance & VP of the Management Board = ================================================== ============================= Conference Call Participants ================== ================================================== ============ * Piotr Dzieciolowski Citigroup Inc., Research Division - VP =========================== ===================================================== Presentation ----------------------------------------- --------------------------------------- Marcin Piechota, Polskie Górnictwo Naftowe i Gazownictwo SA - Head of the IR Division [1] ------------------------------------------- ------------------------------------- Ladies and gentlemen, welcome to the conference of the PGNiG financial performance in the second quarter of 2022. The meeting is hosted by Mr.Przemyslaw Waclawski, Vice President of Finance.He is accompanied by our Investor Relations and performance teams.Let us begin with a presentation of the financial results, and then we'll proceed to our customary Q&A session.In April, following PGNiG's refusal to fulfill payment obligations for natural gas in Russian rubles, Gazprom halted natural gas supplies to Poland under the Yamal contract.In May 2022, PGNiG secured another long-term contract for the supply of US LNG and an agreement signed with Sempra Infrastructure Partners setting out the key terms of purchase and sale of approximately 4 billion cubic meters of liquefied natural gas after regasification per year, starting from 2027. In June 2022, PGNiG's Annual General Meeting passed a resolution to allocate the group's entire consolidated net profit for 2021 to statutory reserve funds.In the second quarter of 2022, the US dollar appreciated by [16 grosz] year-on-year to PLN 4.36 while the euro appreciated [12 grosz] year-on-year to PLN 4.65.The average oil price in the quarter rose by approximately 64% year-on-year to $ 113 per barrel.Translated into the Polish zloty, the quarterly oil price rose by about 80%.The group's results were achieved in an environment with the weighted average price of gas under concentrated on the Polish Power Exchange at PLN 297%, up 5% relative to the first quarter of 2022. During the quarter, the average mean price on the day- ahead market rose by approximately 285% year-on-year to PLN 470 per megawatt hour.The rise in prices in foreign currency market was even faster.Prices of most contracts for gas fuel on the Dutch TTF, up 310% year-on-year.In the second quarter, the group posted EBITDA of PLN 5.5 billion, much higher than in the second quarter of 2022 when the reported EBITDA came in at PLN 1.8 billion.The PGNiG Group's aggregate revenue was PLN 31 billion, over PLN 20 billion from the second quarter of 2021. Revenue from sales of gas increased over [230%] year-on-year to PLN 24.3 billion with a 3% increase in sales volumes, which amounted to 7.6 billion cubic meters.Operating expenses totaled to PLN 27.1 billion, having increased 186% year-on-year.Let us now move on to discussing the performance of each segment.The upstream segment EBITDA was PLN 8.3 billion, far more than the EBITDA for around PLN 2 billion recorded the year before.The segment's earnings for the second quarter of 2022 were driven chiefly by high prices of gas and crude oil filling across commodity markets.Due to unprecedented gas price levels, the upstream segment reported an increase in revenue for sale of gas of 477% (technical difficulty) PLN 5.6 billion, more than the previous year.Revenue from sales of crude oil rose by over PLN 500 million or approximately 77% year-on-year with average quarterly oil price in US dollars higher by 64%.The Trade and Storage segment posted an increase in total revenue of PLN 19.8 billion or 248% year-on-year with an over 280% increase in operating expenses, excluding depreciation and amortization.Revenue from gas sold in the second quarter, taking into account the effect of hedging transactions, increased by over 235% year-on-year to PLN 23.8 billion with the volume of segment sales outside the group, up 3% year-on-year .On the other hand, segment's cost of gas rose to PLN 29.5 billion.That means growth of 320% year-on-year.Net gain and losses on the measurement and exercise of hedging instruments recognized in the operating profit and loss totaled of plus PLN 32 million in the second quarter of 2022. The segment's performance in the first quarter was also driven by the compensation from the price difference payment fund for the PGNiG repay of PLN 1.9 billion.In the second quarter 2022, the Distribution segment's revenue went down 5% year-on-year to PLN 1.14 billion.The segment's result benefited from a 3.6% year-on-year increase in the distribution tariff.However, an 18% year-on-year decrease in gas distribution volumes had a negative effect on the segment's performance.Operating expenses, excluding depreciation and amortization, were 13% higher than a year earlier.But in the second quarter of 2022, the segment's reported EBITDA was down on the corresponding period of 2021, amounting to PLN 400 million.The Generation segment posted a 31% increase in revenue from sales of heat for the second quarter of 2022. Revenue from sales of heat was mainly supported by higher tariffs.Although the average air temperature was 0.9 degree Celsius higher in the quarter.Heat sales volumes rose 5% year-on-year.Revenue from sales of electricity from the segments own sources increased significantly driven among other things, by the commissioning of the new CCGT unit at Zeran CHP plant.Thus, volumes were 68% higher year-on-year which resulted in a 408% increase in revenue from electricity sales.In the second quarter of 2022, the segment's depreciation and amortization expense increased 120% year-on-year to almost PLN 377 million, led mainly by an increase of amortization of CO2.Overall, the segment's EBITDA amounted to PLN 232 million, up 36% year-on-year.Thank you for your attention.We'll be happy to take your questions now.================================================== ============================== Questions and Answers ----------------- -------------------------------------------------- ------------- Marcin Piechota, Polskie Górnictwo Naftowe i Gazownictwo SA - Head of the IR Division [1] ------------------- -------------------------------------------------- ----------- (Operator Instructions) The first question is from Piotr Dzieciolowski.-------------------------------------------------- ------------------------------ Piotr Dzieciolowski, Citigroup Inc., Research Division - VP [2] ------ -------------------------------------------------- ------------------------ Can you hear me well?-------------------------------------------------- ------------------------------ Marcin Piechota, Polskie Górnictwo Naftowe i Gazownictwo SA - Head of the IR Division [3] - -------------------------------------------------- ---------------------------- Yes, we can hear you.Go ahead.-------------------------------------------------- ------------------------------ Piotr Dzieciolowski, Citigroup Inc., Research Division - VP [4] ------ -------------------------------------------------- ------------------------ I wanted to ask you a couple of questions.So the first one would be about volumes contracted for the Baltic Pipe whenever that is constructed.So can you please tell us what's the current schedule of the commissioning of the pipe and how much volumes you procured and for what time frames?So we understand what is additional supply of the gas coming from this direction.-------------------------------------------------- ------------------------------ Marcin Piechota, Polskie Górnictwo Naftowe i Gazownictwo SA - Head of the IR Division [5] - -------------------------------------------------- ---------------------------- Okay.So basically, the Baltic Pipe will be commissioned in the forthcoming months.So we are entering the normal functioning of the pipe starting from October 1 of this year.And we can easily say that for this periods of fourth quarter, we have the full capacity, which is around 3 billion cubic meters of capacity per year during the fourth quarter but we have this capacity full contracted by our own production and our remaining contracts from the Norwegian continental shelf.Regarding the forthcoming months and seasons, and of course, we will inform about the contracted volumes when we'll have the contract signs negotiated and signed.-------------------------------------------------- ------------------------------ Piotr Dzieciolowski, Citigroup Inc., Research Division - VP [6] ------ -------------------------------------------------- ------------------------ Okay.And what is your level of Norwegian production - okay.-------------------------------------------------- ------------------------------ Przemyslaw Waclawski, Polskie Górnictwo Naftowe i Gazownictwo SA - VP of Finance & VP of the Management Board [ 7] ------------------------------------------------ -------------------------------- Maybe - let me please comment on that and clarify a little bit.So as Marcin said, the capacities of the Baltic Pipe for the fourth quarter of this year will be utilized in full by us.But you need to bear in mind that the capacities are not going to be full.So for the fourth quarter of this year, approximately 30%, 38% of the capacities of the Baltic Pipe will be available, which is approximately 800 million cubic meters.And for the next year, we are still like in the process of negotiations.So we are not disclosing detailed information.What we can disclose is that we are secured for the winter, and this is the information that we would like to pass during this conference.-------------------------------------------------- ------------------------------ Piotr Dzieciolowski, Citigroup Inc., Research Division - VP [8] ------ -------------------------------------------------- ------------------------ Sorry, I think I got confused because initially, you said that you will be - you contracted 3 bcm.And now you're talking about 800 million cubic meters in the fourth quarter, 38%.So can you roughly say - so you will have a full utilization of the pipe or 60% utilization or 40% utilization of the month?-------------------------------------------------- ------------------------------ Przemyslaw Waclawski, Polskie Górnictwo Naftowe i Gazownictwo SA - VP of Finance & VP of the Management Board [ 9] ------------------------------------------------ -------------------------------- For this year, for the fourth quarter, we are going to have full utilization of the pipe, but the pipe will be not in 100% mode.So the first quarter of the pipe, meaning fourth quarter of this year, the pipe will be approximately between 30% to 38% of the capacity from the technical point of view.So it will be utilized - we will be able to be utilizing 100% starting from January next year.-------------------------------------------------- ------------------------------ Piotr Dzieciolowski, Citigroup Inc., Research Division - VP [10] ------ -------------------------------------------------- ------------------------ Okay.You will bring roughly 800 million cubic meters.So this means up until the end of December, right?-------------------------------------------------- ------------------------------ Przemyslaw Waclawski, Polskie Górnictwo Naftowe i Gazownictwo SA - VP of Finance & VP of the Management Board [ 11] ------------------------------------------------ -------------------------------- Right, right, right.That's why I told that it might be a little bit confusing.That's why I wanted to clarify that.-------------------------------------------------- ------------------------------ Piotr Dzieciolowski, Citigroup Inc., Research Division - VP [12] ------ -------------------------------------------------- ------------------------ Sure.And how you are contracted for the first quarter next year?-------------------------------------------------- ------------------------------ Przemyslaw Waclawski, Polskie Górnictwo Naftowe i Gazownictwo SA - VP of Finance & VP of the Management Board [ 13] ------------------------------------------------ -------------------------------- So we are now in the process of negotiations.We are talking to, let's say, to the main players.So we are not disclosing this information yet.But for sure, like from the, let's say global perspective, we have enough gas to be able to deliver gas during the winter season already.-------------------------------------------------- ------------------------------ Piotr Dzieciolowski, Citigroup Inc., Research Division - VP [14] ------ -------------------------------------------------- ------------------------ No, no.I'm not asking about the global.I'm asking on the back ... ---------------------------------------- ---------------------------------------- Przemyslaw Waclawski, Polskie Górnictwo Naftowe i Gazownictwo SA - VP of Finance & VP of the Management Board [15] -------------------------------------- ------------------------------------------ I understand, I understand.-------------------------------------------------- ------------------------------ Piotr Dzieciolowski, Citigroup Inc., Research Division - VP [16] ------ -------------------------------------------------- ------------------------ And so - and there are some articles talking about the way that the gas is contracted in Norway.You - companies have to put themselves into line and so on.And now everyone wants to take the gas from Norway.So how does the process look like of contraction?is it that you have to out beat the competitors or there is some order of preference?Or can you shed a bit of light on how confident you can be, how process rounds of the contracting for the first quarter '23?-------------------------------------------------- ------------------------------ Przemyslaw Waclawski, Polskie Górnictwo Naftowe i Gazownictwo SA - VP of Finance & VP of the Management Board [ 17] ------------------------------------------------ -------------------------------- Well, I fully understand the question.But unfortunately, we are not disclosing this information.I may just say that the talks are advancing.So we are not disclosing the details.-------------------------------------------------- ------------------------------ Piotr Dzieciolowski, Citigroup Inc., Research Division - VP [18] ------ -------------------------------------------------- ------------------------ Sure.So changing slightly subject.You got a compensation PLN 1.9 billion for the retail customers.Can you please explain how does (technical difficulty) and how much money do you expect to receive as PGNiG in the second half of the year given where the prices went over the summer?-------------------------------------------------- ------------------------------ Marcin Piechota, Polskie Górnictwo Naftowe i Gazownictwo SA - Head of the IR Division [19] - -------------------------------------------------- ---------------------------- Well, just to clarify that the PGNiG retailers, the company that is receiving the compensation.And of course, maximum amount of compensation that may be paid under a Special Gas Act that was introduced in January this year has a maximum cap of PLN 10 billion.Of course, the payments that we are applying to - from PGNiG retail are based on monthly basis calculations.And this will be a result of the portfolio of gas that was contracted by the PGNiG retail and the tariff price, of course - what will happen in the market.So currently, we have very vague forecast for the remaining half of the year due to this unprecedented volatility in the market.So it's hard to say right now how much - how will be the - how big will be the compensation, needed to cover the cost of PGNiG retail because also we have to [take] in mind that what we have seen in late quarters , that the volume of distributed gas which is mainly a volume that is distributed to the household clients, dropped significantly by 18%, if I'm correct, in the second quarter alone.So this may be a factor behind also - that behind the - we have to take into account when we are thinking about the remaining year.So the drop of - simply the drop of demand for gas in this tariff group of clients.-------------------------------------------------- ------------------------------ Piotr Dzieciolowski, Citigroup Inc., Research Division - VP [20] ------ -------------------------------------------------- ------------------------ Sure.Understood.And one other question I wanted to ask you is your - when somebody looks through your last couple of quarters, it seems that EBITDA hasn't translated into operating cash flow to a large extent.And therefore, some of this was accumulated on the balance sheet via working capital.So you currently have seen in the presentation of, I recall, PLN 3 billion net debt - financial net debt.But I just wanted to ask you how much of the working capital or some other effects would you expect to eventually convert into cash and when?-------------------------------------------------- ------------------------------ Przemyslaw Waclawski, Polskie Górnictwo Naftowe i Gazownictwo SA - VP of Finance & VP of the Management Board [ 21] ------------------------------------------------ -------------------------------- Okay.So the question is very good, but it's not that easy to be answered.So first of all, as you noted, we have a lot of cash in the working capital for the different reasons.One of the reasons is that we are fulfilling our stock on the very high prices of natural gas, and we started this process already at the end of February when the war has started.Of course, much depends on the fact what will happen with the prices of gas in the next - in the following month, which is also very logical.The next thing is that we have a significant amount of cash on the deposits for the transactions of Power Stock Exchange and - both from the hedging transactions.And the last thing that you can clearly note from our financial statements is that a significant part of our EBITDA is generated in Norway, which has a different fiscal system.And the EBITDA coming from Norway does not necessarily in full transfers into cash.But to predict when this money which is now on the deposit, which is now in the working capital, when it will transfer into cash, I mean it's really difficult because we are, in a way, in a crisis mode.So we don't know what will happen with the deliveries of natural gas to Europe.Because of that, we need to be secured from the perspective.So we would rather need to keep our stock very high, let's say, no matter the prices of natural gas.So it's very difficult now to predict when this will be turned back into cash.-------------------------------------------------- ------------------------------ Piotr Dzieciolowski, Citigroup Inc., Research Division - VP [22] ------ -------------------------------------------------- ------------------------ Can you say how much have you invested into working capital since last summer?-------------------------------------------------- ------------------------------ Marcin Piechota, Polskie Górnictwo Naftowe i Gazownictwo SA - Head of the IR Division [23] - -------------------------------------------------- ---------------------------- You can see the level of [bad] net debt on our presentation.So you can follow the levels that we showed there at the end of every quarter.So this is where you can find roughly amount of cash invested on the working capital.-------------------------------------------------- ------------------------------ Piotr Dzieciolowski, Citigroup Inc., Research Division - VP [24] ------ -------------------------------------------------- ------------------------ Yes.Well, you had a PLN 5 billion net cash, second - end of June '21, you have now PLN 3.3 billion net debt.So you had a kind of - this I can work out.But in between, you kind of generated a lot of the EBITDA.So I just wanted to understand how much of the cash (inaudible) - look, I took a lot of your time anyway, and I pass on the floor to somebody who will ask other question.-------------------------------------------------- ------------------------------ Marcin Piechota, Polskie Górnictwo Naftowe i Gazownictwo SA - Head of the IR Division [25] - -------------------------------------------------- ---------------------------- Thank you very much for your questions, Piotr.(Operator Instructions) Okay.We have following up question from Piotr Dzieciolowski.-------------------------------------------------- ------------------------------ Piotr Dzieciolowski, Citigroup Inc., Research Division - VP [26] ------ -------------------------------------------------- ------------------------ Given nobody wanted to ask questions, I volunteer to ask one more.Can I ask you in your Trade and Storage division, you lost PLN 3.4 billion in the second quarter.And I just wanted to understand the mechanics of it.Why - like at what point do you expect increasing the gas prices or gas tariff?So where is this loss really attributable?And how can you pass more efficiently gas price to consumers?Or why is this loss appealing really?-------------------------------------------------- ------------------------------ Przemyslaw Waclawski, Polskie Górnictwo Naftowe i Gazownictwo SA - VP of Finance & VP of the Management Board [ 27] ------------------------------------------------ -------------------------------- Thank you for this question, Piotr.So with respect to the Trade and Storage business, so first of all, we need to remember that when we look at our segments, the Trade and Storage segment receives natural gas from our upstream segment at the current market prices.So whole profit that is - that comes due to the fact of the very high gas prices is allocated into our upstream business and upstream segment.And I think that is like [of this.] The next thing is that we need to - of course, basically, we try to transfer the gas price to our final customer.But we also need to remember that some of the transactions that are concluded on the market, these are (inaudible) transaction.So these are not transactions on the spot.So as you will see on the - you will compare the increase of the natural prices of gas on Power Stock Exchange compares to the average price of the transactions of - on the Power Stock Exchange, you will see the difference of approximately like PLN 100 per megawatt hour ... ------------------------------------------- ------------------------------------- Marcin Piechota, Polskie Górnictwo Naftowe i Gazownictwo SA - Head of the IR Division [28] --------------------------------------------- ----------------------------------- PLN 200. ------------ -------------------------------------------------- ------------------ Przemyslaw Waclawski, Polskie Górnictwo Naftowe i Gazownictwo SA - VP of Finance & VP of the Management Board [29] ---------- -------------------------------------------------- -------------------- PLN 200. Marcin is correcting me now.So that's basically the difference.Of course, we are not the only player on the Power [Service Exchange] but it gives us the view how the transactions are concluded.So apart from the spot transaction that we can transfer one-to-one the price of gas.We have certain contracts that are concluded earlier, and they are not based on the current prices unfortunately.-------------------------------------------------- ------------------------------ Marcin Piechota, Polskie Górnictwo Naftowe i Gazownictwo SA - Head of the IR Division [30] - -------------------------------------------------- ---------------------------- Also, you have to keep in mind that in Trade and Storage, we are trading electricity, which - but the cost of electricity for this purpose increased significantly.So this is another factor behind the higher costs in the segment.And based on the current situation, we have to keep in mind that we are buying gas - all the storages, to fill the storages right now.And so this is also a factor behind the increased costs that we showed in the second ... ------------------------------ -------------------------------------------------- Przemyslaw Waclawski, Polskie Górnictwo Naftowe i Gazownictwo SA - VP of Finance & VP of the Management Board [31] ---------------------------- -------------------------------------------------- - Just coming back to the numbers, if you will compare the average prices of the - from the actual transactions on the Power Stock Exchange, these were at the level of PLN 290 per megawatt hour.While the average prices on Power Stock Exchange, so these are at the level of PLN 472 per megawatt hour.So we can see that on average, we are - not we, but the market is trading gas on the Power Stock Exchange at the prices lower than the national prices that are on the market on (inaudible) ------- -------------------------------------------------- ----------------------- Piotr Dzieciolowski, Citigroup Inc., Research Division - VP [32] ------------- -------------------------------------------------- ----------------- Okay.So basically, this big part - if I do understand you correct, a big part of the PLN 3.4 billion loss is really the fact that you kind of buy on [one day] ahead gas from upstream and sell it on the monthly or the quarterly contracts to fertilizer or other industrial players.And there's gap in the term structure of the contracts, and that's where the result is?-------------------------------------------------- ------------------------------ Marcin Piechota, Polskie Górnictwo Naftowe i Gazownictwo SA - Head of the IR Division [33] - -------------------------------------------------- ---------------------------- Yes, that's correct direction.-------------------------------------------------- ------------------------------ Piotr Dzieciolowski, Citigroup Inc., Research Division - VP [34] ------ -------------------------------------------------- ------------------------ And can you say how much - what was the contribution of PGNiG retail are there to this PLN 3.4 billion?And do I understand correct that PLN 1.9 billion compensation is being booked into this division as well?-------------------------------------------------- ------------------------------ Przemyslaw Waclawski, Polskie Górnictwo Naftowe i Gazownictwo SA - VP of Finance & VP of the Management Board [ 35] ------------------------------------------------ -------------------------------- So we are not disclosing the details about the actual result of the retail.But basically, as you know, the tariffs were increased by approximately 84% at the beginning of the year.And this was much below the actual price level that was supposed to be included in the tariff.Then as you correctly mentioned, the level of - the tool of compensation was introduced by the new legal act that was accepted in January this year.And basically, the idea is that both for the households and for other clients like schools, hospitals, kindergartens, et cetera, et cetera, the result on the sale of gas should be approximately around 0. So it should be neutral for the result of the retail.And that's how the model is working.-------------------------------------------------- ------------------------------ Piotr Dzieciolowski, Citigroup Inc., Research Division - VP [36] ------ -------------------------------------------------- ------------------------ Okay.I understand.And then the last question, I promise this is the last one.How do you think about the retail tariff for the next year?How - given where you contract the gas prices and so on, what the retail customers in Poland may expect for the tariffs next year, assuming no other political decisions taken?-------------------------------------------------- ------------------------------ Marcin Piechota, Polskie Górnictwo Naftowe i Gazownictwo SA - Head of the IR Division [37] - -------------------------------------------------- ---------------------------- Well, we'll be entering the process of negotiation of the tariffs by the end of the year because due to the Special Gas Act, this tariffs are basically frozen for the whole 2022. So taking into account how volatile the gas market is and that we have also still have winter season ahead of us, it's too early to say which way the tariff regulation will him.So unfortunately, we cannot direct you in this matter.Thank you for your questions.(Operator Instructions).Ladies and gentlemen, I think that we have no other questions.So thank you very much for your participation in today's conference call.We would like to invite you to join our press conference, which will be held at 11:00 and is streamed online on our website.So once again, thank you very much for your participation.And if you have any additional questions regarding Q2 and 2022 results and all the developments in PGNiG's operation, please contact our IR team.So thank you very much for your attention today.Have a nice day, and you may now disconnect.Goodbye.In the world of stock legends, George Soros stands out.While his political activities have been a lightning rod for controversy, no one can doubt his financial acumen.After all, he's the 'man who broke the Bank of England,' and made a billion dollars in one day when he shorted the Pound Sterling back in 1992. 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