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Edited Transcript of PGN.WA earnings conference call or presentation 22-Aug-19 7:00am GMT

Half Year 2019 Polskie Gornictwo Naftowe i Gazownictwo SA Earnings Call

Warsaw Sep 11, 2019 (Thomson StreetEvents) -- Edited Transcript of Polskie Gornictwo Naftowe i Gazownictwo SA earnings conference call or presentation Thursday, August 22, 2019 at 7:00:00am GMT

TEXT version of Transcript

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Corporate Participants

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* Marcin Piechota

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

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Conference Call Participants

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* Kamil Kliszcz

Dom Maklerski mBanku S.A., Research Division - Head of Research & Analyst

* Michal Kozak

Trigon Dom Maklerski S.A., Research Division - Research Analyst

* Michal Sopiel

Santander Brokerage Poland, 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, welcome to PGNiG Group's Second Quarter and First Half 2019 Financial Results Conference Call. I will now hand you all to your host, Mr. Marcin Piechota, IR Manager. Sir, the floor is yours.

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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 to discuss the financial results of the PGNiG Group for the second 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 Investor Relations and Performance teams.

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

In the second quarter, the U.S. dollar appreciated by 23 grosz year-on-year to PLN 3.81. The euro strengthened by 2 grosz to PLN 4.28.

The average oil price in the quarter fell 8% year-on-year to nearly $69 per barrel. However, the 9-month average price of oil rose by 14% or almost $9 relative to the second quarter of 2018.

Translated into the Polish zloty, the quarterly oil price fell 2%, and the 9-month average rose by 22% year-on-year.

The group's results were achieved in an environment where the average price of gas under contracts traded on the Polish Power Exchange at PLN 94. That is about 12% more than in the second quarter of 2018.

Volatility was also seen on the Day-Ahead Market with average prices declining by over 30% year-on-year to about PLN 65.

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Unidentified Company Representative, [3]

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The PGNiG Group's aggregate revenue reached almost PLN 8.3 billion, which is an improvement of PLN 0.6 billion or 8% over the second quarter of 2018. Revenue from sale of gas rose by 15% year-on-year with an 11% increase in sales volumes to 6.1 billion cubic meters.

Operating expenses, excluding depreciation and amortization, amounted to PLN 7.3 billion and were higher by 22%. Almost PLN 240 million in impairment losses was recognized from noncurrent assets in the quarter compared with impairment reversals of approximately PLN 70 million in the second quarter of 2018.

In the second quarter, the group generated EBITDA of nearly PLN 1 billion, 40% less than last 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 to discuss the performance of each segment. EBITDA generated in upstream was PLN 0.7 billion, representing a decrease of 2% year-on-year caused by lower commodity prices. The segment's revenue from sales of gas fell 32% mainly as a result of our over 30% year-on-year decline in the price of transferring gas produced in bonds from upstream to trading.

Revenue from sale of crude oil was down PLN 76 million driven mainly by a 16% year-on-year reduction in sales volumes in Norway and decrease in the average oil price in the U.S. dollar for the quarter.

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Unidentified Company Representative, [5]

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In the Trade and Storage segment, revenue from sale of gas rose 15% with sales volumes to external customers higher by 12% year-on-year. That gain on settlement of hedging instrument designed for hedge accounting amounted to PLN 102 million and was higher than the result achieved in the second quarter of 2018, which was a loss of minus PLN 107 million.

The first quarter also saw recognition of gas inventory for write-downs of PLN 152 million and recognition of a provision for the energy efficiency buyout price of PLN 26 million.

Higher hydrocarbon prices brought about a rise in the segment's operating expenses, excluding depreciation and amortization. In the second quarter, they reached PLN 6.3 billion and were 10% higher than a year earlier. Thus, the segment's EBITDA was negative at minus PLN 162 million, about PLN 50 million more year-on-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 5% year-on-year to PLN 1.1 billion in the second quarter of 2019, reflecting cuts in distribution tariffs and lower impact of gas system balancing.

Year-on-year drop in the average temperature in the quarter, which was lower by 1.6 Centigrade, led to an increase in the volume of distributed gas of nearly 15% year-on-year.

Operating expenses, excluding depreciation and amortization, was up by 15% mainly due to reserve for employee bonuses to be paid in the third quarter of 2019.

The segment's reported EBITDA fell by 21% year-on-year to PLN 0.5 billion.

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Unidentified Company Representative, [7]

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In the Generation segment, revenue from sale of electricity grew by almost 60% year-on-year to almost PLN 180 million with market prices of electricity rising in sales volumes higher by 24%. Due to lower temperatures in the quarter and the resulting increase in heat sales volumes of 36% year-on-year, revenue from sale of heat grew by nearly 30% on the second quarter of 2018 (sic) [2019].

Our provision for CO2 emission allowances of minus PLN 43 million was recognized in the second quarter of 2019 and disclosed in the net other expenses.

As a result, the segment's operating expenses increased by 41% year-on-year, while the reported EBITDA fell by 5% year-on-year.

To ensure comparability of data, considering that the subsequent redemption of the acquired CO2 emission allowances presented in the amortization charges will be accompanied by reversal of the provision, EBITDA adjusted for the change in the provision amount would be PLN 105 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) Our first question comes from Michal Kozak, Trigon.

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Michal Kozak, Trigon Dom Maklerski S.A., Research Division - Research Analyst [2]

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I have one question. When do you expect the final decision regarding arbitration of Gazprom? And are you still so sure about winning the case?

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Unidentified Company Representative, [3]

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Yes. Well, we keep trying to believe that this decision will be taken by the end of the year, so by the end of December this year. Anyway, we started with 2016 as a corporation. The request has been filed in the tribunal in 2016. So anyway, it will be 3 years in a row of continuous proceedings of the tribunal, which is quite long. However, I have to say that the understanding of the contract by the tribunal is very deep. The officers, they ask more and more questions. And I have a feeling that this is a kind of academy we are providing for all the public audience and the arbitrage because the -- there, as I said, there's the difference of the knowledge and given the considerations over the content of the contract is as deep as it is needed for -- well, for academics relevant for business cases. We're expecting that, that's what -- from what we understand of the Brazilian space and there'll be -- content of the communications on the tribunal should be terminated by the end of 2019. Thank you.

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Operator [4]

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(Operator Instructions) Our next question from Robert Maj, IPOPEMA.

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

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A couple of questions from my side. First of all, ExxonMobil is exiting the North Sea battles, it seems. It's willing to divest them. Is PGNiG interested in looking at them? Or maybe should we see further acquisition on the North Sea from your side? This is number one.

And the second question on the interim dividend. Should we expect something similar to what happened last year when the company decided to pay the interim dividend in the year-end?

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Unidentified Company Representative, [6]

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Regarding the dividend, we don't exclude the dividends in advance, but let's (inaudible) until now. If you want, I can [show you the charts].

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Marcin Piechota, Polskie Górnictwo Naftowe i Gazownictwo S.A. - Head of the IR Division [7]

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And today, we had them in our meeting, but there was no question regarding the dividend in advance. So this is the answer.

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Unidentified Company Representative, [8]

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Question, the investments, should I (inaudible)? Actually, these investments in the North Sea is mostly the British part of the North Sea and not the Norwegian. And to elaborate a little on this is we are -- most sales in gas house I've seen in the North Sea, rather they're connectible to the existing North Sea grid as we can provide it and drop it into our new pipeline. We're expecting to be completed by the end of 2022, the Baltic Pipe.

And the British part of the -- or the North Sea is a bit detached from this Norwegian price. So it's not the -- in the -- it's our -- it isn't our first interest to -- or first choice to (inaudible) the British assets or British area assets instead of Norwegian assets we are looking for. But in case when I think about stack ranking our agents for the future, that can be interesting. But we will not comment about it, comment around this because this is the investment policy and very detailed. So it's not for the public audience.

Well, the first choice for us is Norwegian price at this North Sea. They even call it Norwegian Sea, but -- and the reason is that we would like to be as sharply connected to the future Baltic Pipe as possible. As the British price, I'll just repeat what I said. As the British price, it is a bit not fully connected to the Norwegian price. This is our second interest rather than first. It would be fair, right? I think it will be all. Thank you.

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Robert Maj, IPOPEMA Securities S.A., Research Division - Analyst [9]

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Okay. Maybe I'd like to also touch upon the hedging gains, which were reported in the second quarter. So clearly, it appears to me that whenever the gas price is relatively low, you record gains from hedging and vice versa. When the gas price is high, you can -- you are -- rather you're reporting losses. So going forward in the third and fourth quarter if the gas price doesn't change, we should expect also some hedging gains in the Trade and Storage segment?

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Unidentified Company Representative, [10]

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What about hedging? It all depends on the contract prices, on the trade prices that we have during the -- making the transactions. And please bear also in mind then that we have also huge exposition on U.S. dollars. And this, some part of -- or big part or even big part of the gain on a hedging activity is derived from U.S. dollar hedging.

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Robert Maj, IPOPEMA Securities S.A., Research Division - Analyst [11]

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Okay. Maybe the last question on the Polish deposits, prolonging the licenses. You are in the process of prolonging the licenses, which expire this year, next year and 2021. And in the meantime, the main geologist for the country, luckily for you, changed. Do you see any material change in the approach of the new person at this authority towards you prolonging your exploration licenses in Poland?

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Unidentified Company Representative, [12]

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Thank you for the question. It's here. Thank you for the question. Apart from the personality, yes, we've noticed that quite a substantial change in the approach of the license office to our request. And now as we were -- for last 2 months, it was 30 -- over 30 requests for prolonging licenses withstanding as each of you -- you requested in the licensing office. Now it's only 9, and we expect all of them to be issued by the end of this month. So the problem has to be solved. And I'm not related to any personalities, as I said, because the quality of the discussion we have with the licensing office is quite high as you -- not always was. Now it is high. And we will be hosting the chief geologist of the country because he accepted our invitation for next week to discuss further issues and just particular licenses. But the licenses problem is -- looks to be over. That's my answer. Thank you.

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Operator [13]

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(Operator Instructions) Our next question from Kamil Kliszcz, mBank.

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Kamil Kliszcz, Dom Maklerski mBanku S.A., Research Division - Head of Research & Analyst [14]

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I have just one question about, say, your upstream acquisition policies because recently, you signed a few LNG contracts. And do you think about covering these contracts if upstream assets in U.S. and British shale assets we have -- we achieve today is the case or not?

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Unidentified Company Representative, [15]

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Well, thank you, but could you make your question more clear for us. What is your question exactly?

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Kamil Kliszcz, Dom Maklerski mBanku S.A., Research Division - Head of Research & Analyst [16]

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I'm wondering whether you are interested in buying upstream assets in U.S.? I mean these shale assets instead of buying fields in Norway or U.K.

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Unidentified Company Representative, [17]

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Okay. Now it's clear to me. Thank you. Well, there's a different chain of value when you combine shale assets in U.S. plus LNG liquefaction and transportation and regasification service than the upstream, which we -- the part of our upstream investments we have in Norway, where we just sort of dig out gas to the pipeline and then present it to Poland. Also, the internal revenue, too.

So it is consideration that is not yet decided to follow exactly. Besides the investment finance, which is in Norway and in the U.S., which is quite favorable for investors, there is no difference here. But the -- that's a different model that we followed so far. And it's not ready. It's just -- it's still stopped yet. So it's not decided to follow or not to do or follow.

And certainly, it's not rejected as a principle, as a potential later acquisition, but I've not yet decided. But please consider this is the different model of chain of value with LNG and with conventional gas fields and conventional pipeline transportation. So there's not just paste, copy paste. That's a different model. We are not ready yet to make a decision over this second potential. That's all I can explain. Thank you.

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Operator [18]

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(Operator Instructions) We have a question from Michal Sopiel, Santander.

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Michal Sopiel, Santander Brokerage Poland, Research Division - Equity Analyst [19]

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I'm sorry. In May, you generally commented that it's not -- it was not interested in -- or did not expect any changes to shareholder structure of heat and power plant in Stalowa Wola. Maybe could you please give us more details whether there is any risk that PGNiG may reconsider increasing its stake -- the stake in the project in Stalowa Wola?

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Unidentified Company Representative, [20]

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Okay. Thank you for the question. Of course, it's a -- very first months, but we'll not comment on this because we are -- as you may know, we have been sued by the Abener, and we are in court now, right now with them. I know that you can -- what is accessible for the public audience and analysts is what we publish officially on our website as we communicate, and that's all. We'll not comment on this. Sorry for that, but those are just the policy of the company. We cannot comment on it. Yes. Thank you.

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Operator [21]

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(Operator Instructions) We have no other question at this moment. Dear speakers, back to you for the concluding remarks.

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Marcin Piechota, Polskie Górnictwo Naftowe i Gazownictwo S.A. - Head of the IR Division [22]

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Ladies and gentlemen, thank you for your participation. And we encourage you that you do watch the press conference, which will be streamed at www.pgnig.com at 11:00. If you have any additional questions regarding financial results, feel free to contact IR team.

Thank you once again, and have a nice day.

Goodbye.

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Operator [23]

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Ladies and gentlemen, this concludes today's conference call. Thank you for you participating. You may now disconnect.