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Edited Transcript of PGN.WA earnings conference call or presentation 14-Nov-19 8:00am GMT

Q3 2019 Polskie Gornictwo Naftowe i Gazownictwo SA Earnings Call

Warsaw Dec 5, 2019 (Thomson StreetEvents) -- Edited Transcript of Polskie Gornictwo Naftowe i Gazownictwo SA earnings conference call or presentation Thursday, November 14, 2019 at 8:00:00am GMT

TEXT version of Transcript

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Corporate Participants

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* Aleksandra Dobosiewicz

Polskie Górnictwo Naftowe i Gazownictwo S.A. - Deputy Director of Finance Department

* Marcin Piechota

Polskie Górnictwo Naftowe i Gazownictwo S.A. - Head of the IR Division

* Michal Wladyslaw Pietrzyk

Polskie Górnictwo Naftowe i Gazownictwo S.A. - VP of the Management Board & VP of Finance

* Piotr Grzegorz Wozniak

Polskie Górnictwo Naftowe i Gazownictwo S.A. - President of the Management Board

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Conference Call Participants

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* Jonathan David Lamb

Wood & Company Financial Services, a.s., Research Division - Equity Analyst

* Robert Maj

IPOPEMA Securities S.A., Research Division - Analyst

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Presentation

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Operator [1]

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Ladies and gentlemen, good day, and welcome to the PGNiG Group Financial Results for Q3 2019. Today's conference is being recorded.

At this time, I'd like to turn the conference over to Marcin Piechota, IR Manager. Please go ahead, sir.

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Marcin Piechota, Polskie Górnictwo Naftowe i Gazownictwo S.A. - Head of the IR Division [2]

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Ladies and gentlemen, welcome to the conference call held to discuss the financial results of the PGNiG Group for the third quarter of 2019. The meeting is hosted by Mr. Piotr Wozniak, Chief Executive Officer; Mr. Michal Pietrzyk, Vice President for Finance; and Mr. Maciej Wozniak, Vice President for Trade. They are accompanied by our Investor Relations and Performance teams.

Let us begin with a presentation of the financial results, and then we'll proceed with our customary Q&A session.

In the third quarter of 2019, the U.S. dollar appreciated by 18 grosz year-on-year to PLN 3.88, while the euro was stable year-on-year at PLN 4.32. The average oil price in the quarter fell 18% year-on-year to nearly $62 per barrel. The 9-month average price of crude oil fell slightly by 2% relative to the third quarter of 2018 to $66 per barrel. Translated into the Polish zloty, the quarterly oil price fell 14%, and the 9-months average rose by 3% year-on-year.

The group's results were achieved in an environment with the average price of gas under contracts traded on the Polish Power Exchange at above PLN 88, about 3% less than in the third quarter of 2018. On the Day-Ahead Market, average prices declined by over 50% year-on-year to PLN 51 during the quarter.

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Unidentified Company Representative, [3]

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The PGNiG Group's aggregate revenue was just over PLN 7 billion, lower by about PLN 0.5 billion or 7% from third quarter of 2018. Revenue from sale of gas declined 10% year-on-year despite an 8% increase in sales volumes to 5.5 billion cubic meters.

Operating expenses, excluding depreciation and amortization, amounted to PLN 6.2 billion and were higher by 2%. Almost PLN 50 million in impairment losses on noncurrent assets was reversed in the quarter compared with impairment reversal of approximately PLN 140 million the same period the year before. For the third quarter, the group posted EBITDA of over PLN 800 million, down 45% year-on-year.

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Marcin Piechota, Polskie Górnictwo Naftowe i Gazownictwo S.A. - Head of the IR Division [4]

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Let us now move on to discuss the performance of each segment. EBITDA generated in upstream was close to PLN 0.7 billion, representing a year-on-year decline of 51% caused by lower commodity prices. The segment's revenue from sales of gas fell by 46% mainly as a result of an over 50% year-on-year decline in the price of transferring gas produced in Poland from upstream to trading.

Revenue from sale of crude oil was down PLN 131 million at the combined effect of a 23% year-on-year decline in the volumes of crude oil produced in Norway and an 18% decrease in oil price.

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Unidentified Company Representative, [5]

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In the Trade and Storage segment, revenue from sale of gas fell by PLN 0.5 billion with sales volumes up 8% year-on-year. The gain on settlement of hedging instrument designed for hedge accounting amounted to PLN 103 million. The third quarter also saw a reversal of gas inventory write-downs of PLN 149 million and recognition of a provision for the energy efficiency buy-out price of PLN 48 million.

Lower hydrocarbon prices brought about a reduction in the segment's operating expenses, excluding depreciation and amortization, which in the third quarter of 2019 reached PLN 5.4 million, down 11% from a year earlier. Thus, the segment's reported EBITDA was a loss of PLN 221 million, approximately PLN 250 million less than in the corresponding period in the previous year.

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Marcin Piechota, Polskie Górnictwo Naftowe i Gazownictwo S.A. - Head of the IR Division [6]

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Revenue generated in the Distribution segment fell 11% year-on-year to PLN 960 million in the third quarter of 2019, reflecting chiefly the distribution tariff prices and the PLN 109 million decrease in the net income/cost of gas system balancing. With a year-on-year drop in the average temperature for the quarter, which was lower by 0.75 centigrade, the volume of distributed gas fell slightly by 1% year-on-year.

Following an increase in employee benefits expense mainly attributable to higher base pay rates and social security contributions, operating expenses, excluding depreciation and amortization, rose 15% year-on-year to PLN 550 million. The segment's reported EBITDA fell 28% year-on-year to PLN 400 million.

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Unidentified Company Representative, [7]

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In the Generation segment, revenue from sale of electricity fell 12% year-on-year to nearly PLN 100 million, with market prices of electricity rising and sales volumes down by 19%. Due to lower temperatures in the quarter and resulting 11% increase in heat sales volumes, coupled with a 7.3% increase in the average heat sales tariff charged by TERMIKA SA, revenue from sale of heat grew 13% year-on-year.

A provision for CO2 emission allowances of PLN 42 million was recognized in third quarter of 2019 and disclosed in net other expenses. As a result, the segment's operating expenses went up significantly by 24% year-on-year, while the reported EBITDA fell 156% from the same period the year before. To ensure comparability of data, EBITDA adjusted for the change in the provision amount would be PLN 23 million.

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Marcin Piechota, Polskie Górnictwo Naftowe i Gazownictwo S.A. - Head of the IR Division [8]

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Thank you for your attention. We will be happy to take your questions now.

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Questions and Answers

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Operator [1]

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(Operator Instructions) We'll now take our first question from Jonathan Lamb from Wood & Company.

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Jonathan David Lamb, Wood & Company Financial Services, a.s., Research Division - Equity Analyst [2]

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I'm a little sketchy on the whole CO2 emission allowances issue in Generation. So do you think you could just walk us through what that means? Because you're talking about making allowances, but then there'll also be a reversal of the provision. So where are we going to end up net?

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Aleksandra Dobosiewicz, Polskie Górnictwo Naftowe i Gazownictwo S.A. - Deputy Director of Finance Department [3]

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Jonathan, this is Aleksandra Dobosiewicz speaking. As for the Generation segment, we had such a situation that our subsidiary, TERMIKA, has -- will buy the emission allowances at the end of the year. So for the time being, they are creating -- or creating a provision for the missing CO2 allowances.

The accounting currently of the allowances is at the asset side, which is then amortized, depreciated in the profit and loss account, however, not the provision. The creation of provision is in the other operating revenues cost and decreases the EBITDA currently in this quarter and the previous quarter.

And in the fourth quarter, when TERMIKA will buy the CO2 emission allowances, they will be depreciated to depreciation cost, obviously, and the provision created in the second and fourth quarter will be decreased, kind of reversed. So this will improve the EBITDA in the fourth quarter. So we have kind of a different place of recognition of CO2 emissions because of the difference between the provision and the depreciation of the existing in our balance sheet CO2 emission allowances.

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Operator [4]

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(Operator Instructions) We will now take our next question from Robert Maj from IPOPEMA Securities.

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Robert Maj, IPOPEMA Securities S.A., Research Division - Analyst [5]

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Two questions from my side. First, the arbitrage, any more useful you can share with us at this point of time? And the second question, the changes to the government and the regulatory, establishing a Ministry of Climate and reshuffling of the main geologists, do you see any upside or downside from these changes at this point of time?

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Piotr Grzegorz Wozniak, Polskie Górnictwo Naftowe i Gazownictwo S.A. - President of the Management Board [6]

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Thank you for the question. I'm glad it's not a seminar on the accounting, but another question that probably one of them I can answer, means that, yes, we have some developments with the arbitration procedure, mainly we've -- quite recently, we've got a so-called procedural orders from the arbitrage. And this consists of several, I think, 3 or 4 templates to be filled by parties, which is a strange approach to my understanding because this is just another exercise on counting the data which they need.

Anyway, to make a long story short, we expect the reaction of the arbitrage by the end of the year, I mean, in the course of December. And I think this is fresh through the -- some news we may have after 10th of December. This is the -- this is due to the schedule we may understand, but not -- we are not notified on this. We can -- from the schedule, we can understand of the proceedings of the tribunal. So after 10th of December, please refer back to us, and then we will probably make some more concrete comments.

As we said before, it was 3 months ago when we were talking about the half year results. We expect the end of the proceedings by the end of the year, and the award should be granted at the break of 2019 and '20. That's what we expect. And we keep expecting it because there's now -- for now, it's the procedural order we have got from the arbitrage's number, it takes -- it took a number, 114, that means that 114 times the arbitrage asked the parties about the comments, which is exceptionally long and extensive proceeding. And the period of the proceeding is now over 3 years.

So we have good rights to expect the results at the end of the proceeding quite recently. I don't know if that helps you very much, but we are not allowed to close any particular details of the proceedings due to the interest of the company, not publicly at least.

Yes. And over the years -- thank you. Over the government, yes, we do not comment on this. We obey what we are -- what we have to, and we are not very much influenced by these changes. We are -- we expect the continuous policy of the government as it was before, and no changes. Our first and foremost superior, which is the regulator of energy, was untouched. As you may know, this is the office and the person -- and the head of the office is in place. And we do not expect any -- we didn't record any reaction from the regulatory office, which we follow very strictly. We are mostly oriented over investors rather than the government, so that's our approach at least for now.

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Robert Maj, IPOPEMA Securities S.A., Research Division - Analyst [7]

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Okay. Any comment on the dividend maybe at this point of time? Or too early to say what the level of dividend could be?

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Michal Wladyslaw Pietrzyk, Polskie Górnictwo Naftowe i Gazownictwo S.A. - VP of the Management Board & VP of Finance [8]

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Obviously speaking, it's too early to comment on the dividend. It's a next year question.

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Operator [9]

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There are no further questions in the queue. (Operator Instructions) As there are no further questions, I'll turn the call back to the speakers for any additional or closing remarks. Thank you.

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Marcin Piechota, Polskie Górnictwo Naftowe i Gazownictwo S.A. - Head of the IR Division [10]

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Ladies and gentlemen, thank you for your participation in today's conference call. We totally invite you to watch the press conference, which will be held at 11:00 a.m. and streamed online at pgnig.pl. For additional information regarding Q3 results and the company's performance, please contact our IR team.

We wish you a pleasant day, and goodbye.

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Operator [11]

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Thank you, sir. That concludes today's conference call. Thank you for your participation, ladies and gentlemen. You may now disconnect.