Polski Koncern Naftowy Orlen SA

WSE:PKN

Earnings Call Transcript 2021-Q1

[Joanna Zakrzewska, executive]

Good afternoon, ladies and gentlemen, and welcome to the conference -- press conference, which will be devoted to the consolidated financial results of PKN ORLEN and the ORLEN Group for the first quarter of 2021.

I would like to particularly welcome members of the Management Board, Mr. Jan Szewczak, member of the Management Board for Finance; as well as Mr. Zbigniew Leszczynski member of the Management Board for Development.

[Jan Szewczak, executive]

Good afternoon. In the first part of the presentation, we will discuss details on the financial performance of PKN ORLEN, and this will be followed by a Q&A session. We received and will receive and keep receiving your questions. Apologies for the mic being off.

So let me repeat the welcome to the next conference, yet another conference summarizing PKN ORLEN's results after the first quarter, a weird, very difficult and challenging year of 2020, which was the pandemic year, the coronavirus year. Although the first half of this past year of 2020 did not bode very bad, and it was normal compared to this first quarter of 2021, which was fully COVID quarter, both for the economy at large and the site, and very difficult and very challenging period for us as well.

This quarter, quarter 1 of 2021, was a real challenge for us and also a real test for us, for our competencies, for our flexibility and the way we can adapt to those challenging conditions for the business in general. And we can say after this experience that our performance was very solid. We have not put any breaks on our investments, neither have we seen that we see our solid financial performance being affected anyway. I'll obviously discuss the mailed indices later on, and we'll discuss it in more detail on the following slides.

PKN ORLEN closed the first quarter of the year with an operating LIFO EBITDA profit at PLN 2.4 billion, nearly PLN 2.5 billion in a very, let me repeat again, a very challenging lockdown quarter with lots of restrictions imposed and lots of limitations on transport and communication, as well as the consumption, which obviously could not be comparable to the previous periods.

And in terms of our net profit, we almost reached PLN 2 billion, specifically PLN 1.9 billion, which was a very positive and solid results versus the first quarter of 2020. In terms of the consolidation effect, a solid EBITDA was also reported for the ENERGA Group at PLN 800 million, PLN 0.8 billion, which is yet another proof that our very challenging decisions, very forward-looking decisions of the management Board and specifically the President of Management Board, Daniel Obajtek, and also the corporate decisions, corporate approvals of the Supervisory Board were very positive and very well grounded and corroborate that our aspirations and our possibilities of creating a multi-energy group were obviously right. As you can see, the power energy, power development and power generation sectors' input is very, very solid, and this proves that our decision was well based.

In terms of revenue, the revenue was close to PLN 25 billion, specifically PLN 24.6 billion, despite a lower -- significantly lower consumption and also limitations on tourism and communication in general and also despite a lower throughput of crude oil because we processed less oil, obviously, down 19% year-on-year, because of different and obviously lower demand from the market. We also reported a drop of sales, down 11% year-on-year, which is obviously due to lower consumption persisting as we speak; and as we can see that in many countries, the aviation market is down or even nonexistent, so to speak; and also, for instance, certain lockdowns and curfews in a number of countries in which we operate as well because we do not only operate in Poland but also in the neighboring countries.

In terms of our investments, let me stress again that we have not put any hold on our investments, especially growth investments. We spent nearly PLN 2 billion on growth investments, specifically PLN 1.8 billion. This all fits well within our strategy and as well as the question of the dividend payout for 2020 at PLN 3.5 billion. So in summary, in a nutshell, I can say that quarter 1 saw also a lot of cash flows. We have controlled our -- we controlled our debt, and also certain indices went up.

The CO2 cost was relatively low. I will develop on it later on. We have secured CO2 emission costs by 2023. These have been rapidly going up, but we have them secured at EUR 24 per ton, while they are skyrocketing right now at -- to almost EUR 50 per ton, and we can expect that they will continue to grow. But we have taken -- we had taken a very courageous decision, both the Management Board and also the Supervisory Board and also the President of the Management Board, Daniel Obajtek, to have forward-looking contracts for the purchase of CO2 emission rights. And it bears fruit right now and translates into measurable savings at around PLN 600 million in savings in that account.

We also have continued to declare a solid dividend at PLN 3.5 per share. And what is important in a very difficult lockdown quarter, our financial performance is comparable to our record-breaking performance from the period 2015, 2017. So all in all, it gives me confidence to recap that the challenging -- or despite the challenging macro situation and lower demand on fuel -- for fuels and also maintenance. The shutdowns, which translated into lower throughput, down 90%, as I have mentioned, at around 6.2 million ton of crude oil. And the utilization stood at more than 70%, 72%.

I said that also our sales went down, which is absolutely normal, it is obvious because it went down, but it went down not as much as in our neighboring countries and in other markets, not only in other countries that we operate, but also in the countries and markets which are richer in terms of citizens' buying power and also which have stronger economies.

So despite all these challenging conditions, we generated a LIFO-based EBITDA at a very solid level at nearly PLN 2.5 billion, specifically PLN 2.4 billion, translating into a growth year-on-year by PLN 0.8 billion, which I believe is a very solid performance, considering that we had to operate in a very difficult and challenging quarter. And yet, we were able to reach a LIFO-based EBITDA of nearly PLN 2.5 billion.

This shows that we are not afraid of challenges. We can take challenges in stride. We are a very well-managed group, and we have diversified sources of both revenue and also our business opportunities as well as the sources that we use to finance our investments. We -- as I said, we have not put any break on also M&A activity and M&A projects. These are all in progress and progressing as planned. I will develop on it later on.

This is, as I said, a proof that our foundations as a group are solid. Our footing is strong despite the fact that the petrochemical, not only petrochemical business, but also, in general, oil -- gas and oil business, went through an unprecedented situation and problems, especially last year, especially the end of last year in terms of the prices of feedstocks. The price of feedstocks keeps developing and changing rapidly. They are absolutely fluctuating. Right now, we see that they are going up. This obviously has an effect on the performance. Still, we managed to defend our position in the context of these very difficult challenging macro conditions.

In terms of our cash flows from operations, this is another important information. They came in at nearly PLN 4 billion.

In terms of investments, as I mentioned before, we have not put any break on our investment project, standing at around PLN 2 billion.

In terms of our net debt at the end of the quarter, it stood at PLN 13.1 billion, going up year-on-year by PLN 400 million, so relatively -- so by a relatively slight amount or small amount. Although we know that our debt continues to be -- debt financing continues to be the main source of financing, not only for our investments, but on business as well, not only for the petrochem business, but in general.

Other highlights included the fact that we saw the second emission of ESG-based green bonds at PLN 1 billion. Although I do believe that if we decided to push a little bit more, we could increase that amount for the ESG bond submission because we saw a lot of interest from the investors.

Other highlights included the fact that we signed contracts for purchase of crude oil, both with Rosneft but also with ExxonMobil.

And secondly, we found a very professional, a very checked and proven company to work for -- work with in terms of our wind farm project on the Baltic Sea. I'm talking about Northland Power in Canada, and we expect this cooperation, this partnership to flourish.

And we also saw a decision by the European Commission in terms of our acquisition of PGNiG, decision to move the process, the future of this process to the Polish Competition and Consumer Protection Authority (sic) [ Polish Office of Competition and Consumer Protection ] authority.

We also have a new project. We started to launch the new project called ORLEN in motion. This is a new format of retail sales project and also parcel pickup points. We are working on this as well and as well as on courier services. We have own parcel pickup lockers being put up currently. I do believe that it will allow us to generate hundreds of millions of PLN in revenue, if not billions.

Other highlights of the first quarter 2021 included events related to ESG. We came first among certified employers in Poland in the Top Employer 2020 ranking for the eighth year running, at eighth time running as the only oil and gas company in Europe. We also received a distinction of the World's Most Ethical Company 2021, a very prestigious ranking. We also acquired 3 onshore farms, wind farms, and this is an apple in our eye and will continue to be an apple in our eye. We'll -- ahead of a number of decisions in this area. ENERGA Group started working on the planned construction of a photovoltaic farm of 100 megawatts.

In terms of our innovations, at ORLEN Asfalt, we started a special type of asphalt project which will be characterized by the fact that it will leave a smaller carbon footprint. And this type of production project will have a positive effect on both our image and also on the environment and the climate.

We are continuing works to include EV, ENERGA's EV charging stations to our PKN ORLEN's network as a result of which we will soon become a leader in this area, and we estimate that we will have -- soon have 400 EV chargers because we see that the demand is growing and the customers are and clients are asking for it because their demand is going up. And we want to be a pioneer on the vanguard of this market, and I do believe this is doable and feasible.

Before I move on to discuss more our financial performance in more detail, I'd like to -- on behalf of Daniel Obajtek and the Management Board, in general, I'd like to thank all our employees traditionally for their involvement, for their hard work, for the effort they are putting in this very difficult challenging period, during which we personally were at risk of -- in contracting coronavirus and COVID, especially in the last months, in the couple of months last month. And despite those challenges and threats, we can say that we have performed very well, and we are very proud to say that our performance in this weird, as I said, year, in the very challenging year of 2020. And I do believe that -- I hope that this year will not repeat, and this period will not repeat. It will go down to history.

As I said before, our model downstream margin went up by USD 3.9 per barrel versus the first quarter of 2020 due to a major drop in the refining margin due to lower consumption and lower demand for fuel due to COVID-19 but also an affected sentiment in the business in general and a number of restrictions and limitations in terms of demand, but also in behavior in terms of consumption around the world as well as a lower differential for Brent and Ural crude.

Increases in crude oil prices translated into higher costs of own utilization. The margins on diesel oil went down by 65%. This shows a sheer scale of the effect on the economy and the freezing effect on the economy. And the same applies for gasolines and also heavy fuel oil going down by around -- by, respectively, 11% and 21%. Also, the PLN to euro exchange rate was weakened, and this had a negative effect on our performance as well.

In terms of the consumption data for fuels,versus -- and also GDP. This is presented on Slide #6. In the first quarter, we expected that our fuel consumption year-on-year will be lower across all our markets, which is obviously due to limitations on transport and consumption as the pandemic have -- was evolving and also closed borders and not only between countries but also between regions because we had certain regions, such as Warmia and Masurian region was absolutely locked down. And the same for Europe as well, a lot of curfews were introduced in Europe. This all obviously translated into GDP and production and consumption.

In the second quarter, year-on-year, I do believe we will see a positive trend. And we have already been seeing it in April. And when you look at those tables in the charts on that slide, you will see that Poland was not in a very difficult situation compared to other countries such as the Czech Republic and Germany, especially in the Czech Republic, in the country in which a lot of restrictions and limitations were introduced.

Slide #8 shows our financial performance, and you can see that in the first quarter of 2021, we saw an increase in revenue year-on-year by 11% due to higher quotations of both refining and petrochemical products due to higher crude oil prices, combined with lower sales volumes. This is obviously a natural trend to see the lower the sales, the lower, obviously, the more affected, obviously, the margins.

We reported, as I said, PLN 2.4 billion in EBITDA LIFO and going up nearly PLN 800 million versus the first quarter last year, mainly due to consolidation of the ENERGA Group and the positive impact of it, the reversal of write-downs on inventories, NRV, usage of historical layers of inventories related to maintenance shutdowns on our installations, both at PKN ORLEN and also at ORLEN Lietuva and as well the impact of CO (sic) [ CO2 ] contract valuation as well as changes in consolidation methods applied to Baltic Power. All the above positive effects were unfortunately partially offset by negative macro impact, lower sales volumes, lower margins in terms of both wholesale and retail as well as higher labor costs and revaluation of CO2 provisions.

In terms of the impact of crude prices on our environment -- on inventories valuation with a LIFO effect was at PLN 1.1 billion. which obviously affected our results. Our financial result was down at minus PLN 0.1 billion as a result of the surplus of negative foreign exchange differences and interest costs at positive impact of settlement and valuation of derivative financial instruments.

The net result, we reported in the first quarter of the year was at PLN 1.9 billion, nearly PLN 1.9 billion. And we are seeing a number of positive aspects in terms of our debt position. We also saw a decline of a very important ratio, net debt to EBITDA going down, which is very important to us. And we will keep looking at it. We'll keep a watchful eye at this very indicator. It is very important to us in terms -- in the context of our new projects and financing sources.

Slide #9 shows segment results, EBITDA-based LIFO by segment -- LIFO-based EBITDA by segment. And I will give the floor over now to Mr. Zbigniew Leszczynski to discuss the following slides.

[Zbigniew Leszczynski, executive]

Again, a very warm welcome to all of you. As Mr. Szewczak has said, we have just concluded a very difficult quarter in terms of our macro situation, but we managed to prove yet again that despite such difficult conditions, we are able to operate efficiently and report a solid performance. We are able to manage our company in such a way as to generate positive effects, and we are able to look optimistically into the future. Mr. Jan Szewczak put, in a nutshell, the main parameters in terms of our financial performance and our economic indicators. I will now present and discuss our situation by segment in more detail.

Let me start with Refining segment, which reported an increase of PLN 162 million year-on-year. However, in the end, we saw a decline in the Refining segment down PLN 190 million, which was mainly due to the reversal of write-offs of inventories, NRV and also the usage of historical layers of inventories, combined with negative macro effect and lower sales volume. So in a nutshell, this shows that this has been a very difficult time for the refinery business, not only for PKN ORLEN, but across Europe and the world as well.

And in terms of Petrochemical business, we saw a result at PLN 659 million, down -- going down year-on-year, mainly due to negative impact of lower sales volumes, combined with positive macro effect and a reversal of write-offs of NRV.

Power Generation segment, which is another important segment for us, we saw a PLN 1.1 billion performance going up year-on-year by PLN 600 million, mainly on the back of positive impact of consolidation of the ENERGA Group and also changes in consolidation methods applied to Baltic Power as well as negative macro impact, as discussed before, as well as lower sales volumes and also the acquisitions of provisions -- and provisions for CO2.

In terms of the Retail business, we saw performance at -- nearly PLN 550 million going down year-on-year, mainly due to a negative impact of lower sales volumes on the back mainly of the pandemic as well as lower fuel margins, combined with positive impact of higher nonfuel margins.

In terms of Upstream, we reported PLN 14 million, going down, mainly due to negative impact of hedging transactions and lower sales volumes, combined with positive effects of higher crude oil and NGLs and gas prices.

Corporate Functions, the last segment discussed on the slide, saw an increase in EBITDA LIFO -- a decrease, I'm sorry, in EBITDA LIFO, mainly due to the positive impact of CO2 contract valuation in the amount of PLN 568 million, combined with a negative impact of higher labor costs.

Let me now move over into more details on our performance by segment. Let me start with the Refining segment again. In the first quarter of the year, the Refining segment reported a loss at LIFO-based EBITDA at PLN 191 million, which is still a solid level because it was higher year-on-year compared with the first quarter of 2020. And as I said -- as we said before, this has been a very difficult and challenging period for the refining business around the world.

As you can see on Slide #10, the main negative impact -- the main negative indicator is the negative macro impact, mainly due to a drop in middle distillates; a lower Brent/Ural differential, going down by USD 0.9 per barrel; the strengthening of PLN against U.S. dollar; and a negative impact of hedging transactions on crude oil purchases as well as product sales; and higher cost of internal usage due to prices of crude oil going up by USD 11 per barrel. Those negative effects, however, were partially limited and offset by the positive effects on higher cracks and light distillates as well as heavy refining fractions.

The sales volume stood at -- sales volume effect stood at around PLN 400 million. And all in all, we reported a decline by 11% due to lower sales of gasoline, going down by 90%; diesel, 8%; and LPG; as well jet aviation fuel; as well as heavy fuel oil as well. These results are mainly due to the historical usage of historical layers of inventories and reversals of write-offs -- write-offs, as we said before.

On the next slide, we continue discussing the operational data for our Refining business. The throughput was at 6.2 million tons of crude going down year-on-year, mainly due to the fact that we had to adjust the capacities -- production capacities across all our refineries. We also had unplanned maintenance shutdowns in the first quarter of the year.

At Plock, we saw lower utilization ratio year-on-year, mainly due to maintenance shutdowns of hydrocracking, [indiscernible], other -- the CDU and other units. In addition, we also had certain technical problems on the olefin unit. And also, we continue -- we carried out works related to preparation of our petrochemical installations for the planned shutdown in the second quarter of the year.

At Unipetrol, the throughput was comparable year-on-year. On the one hand, we reduced our crude throughput due to lower demand for fuels as well as unstable performance of the PE3 unit, and this was combined by a close-down in the maintenance shutdown of the Kralupy refinery.

At ORLEN Lietuva, we saw a decrease by 21 percentage points in terms of our throughput year-on-year, mainly due to the fact that we had to adjust our throughput to macro situation and to the demand for products.

Let me now go through the analysis by -- of sales by country. In Poland, we saw a decline in sales by 8% year-on-year, mainly due to lower sales of gasolines, aviation fuel, diesel as well as LPG all going down year-on-year. The same applies for -- to Asfalt. At ORLEN Lietuva, the declines were by -- the decline was at 14%, mainly on the back of decline of gasolines, LPG, asphalts and jet aviation fuel. In the Czech Republic, our sales went down by 17% year-on-year on the back of lower sales of diesel oil, gasolines all going down as well as aviation fuel.

The next segment, which is our key segment that keeps us stable in those difficult times, is the Petrochemicals business. In the first quarter of the year, the Petrochemical performance was at nearly PLN 670 million (sic) [ PLN 660 ], going up by 14%, despite the fact that the margin went up, but this was offset by the volume effect. The positive macro impact year-on-year, which we have mentioned before, in terms of Petrochemicals was mainly due to an increase on margins on polyolefins, fertilizers and PVC as well as the weakening exchange rate of PLN versus the euro. But these positive effects were partially offset by negative impact of lower margins on olefins as well as the negative impact of hedging transactions on our product sales.

In the first quarter of 2021, we saw a decline in sales by volume, in terms of Petrochemicals, going down by 2% year-on-year, especially in terms of lower olefins sales going down by 12%; PVC, down by 28%; PTA going down by 10%. This, however, was combined with higher sales of polyolefins going up by 49% and fertilizers going up by 8% in the first quarter of the year.

Our -- one of our group companies, Anwil, reported a PLN -- LIFO-based EBITDA of PLN 93 million, going up. And the same applies to PTA.

Slide #13 is devoted to more operational data of the Petrochemicals business. We saw the utilization ratio going down in the first quarter, combined with higher production of fertilizers and a higher utilization ratio for polypropylene in Lithuania. This translated into general sales volumes decreased by 2% year-on-year. In Poland, we saw a decline of 12% year-on-year due to lower sales of PVC, PTA and olefins. However, this was combined with an increase in the Czech Republic by 12% (sic) [ 16% ] year-on-year due to higher sales of polyolefins and fertilizers going up, in general, in terms of polyolefins going up in general in the second quarter of 2020. In Lithuania, we saw a higher sales, 20% (sic) [ 42% ], combined with the fact that we had no maintenance shutdowns, and the market was favorable for petrochemical products.

The next segment we'd like to focus on is our Energy or Power Generation segment. On Slide #14, we present to you those details. And these are very strong results and very strong performance, mainly generated PLN 1.1 billion of LIFO-based EBITDA, going up. And I'd like to mention again, and this has been mentioned time and again by Daniel Obajtek, as Mr. Jan Szewczak mentioned before, this is yet again a proof that the acquisition of ENERGA Group was a very good decision, which reinforced our financial strength and our stability. And this is the direction we will keep focusing on and we'll keep following, strengthening our power generation muscle. And the results that we are showing right now prove that our decision was courageous but well grounded, and it was efficient and corroborates our assumptions from the decision-making period as we prepared to do this transaction.

The LIFO-based EBITDA was up by -- is twofold, and it was mainly due to the acquisition of ENERGA and consolidation of ENERGA. It was generated in combination with lower power generation figures reported by PKN ORLEN alone due to the shutdown of the CCGT unit at Plock, as well as the change in the Baltic Power consolidation method. You will see how the volume effect and macro effect impacted our LIFO-based EBITDA. But these do not affect the ENERGA Group's performance as it was only consolidated in the second part of the year. Lower sales at PKN ORLEN was mainly due to payment and shutdown for the CCGT unit at Plock which should be brought back onstream in the beginning of June this year. Others include mainly the PLN 0.2 billion (sic) [ PLN 0.8 billion ] decrease impact of the ENERGA Group results consolidation, a PLN 0.2 billion year-on-year change in the Baltic Power consolidation method, and as I mentioned before, the CO2 reserves revaluation at minus PLN 0.2 billion year-on-year.

Let me now move on to the selected data, operational data for our Energy business. The slide, as I said, is a proof that we have taken a good decision that our strategy is solid, and our forward-looking statements are well on that. We are betting on zero low-emission sources because, right now, we have nearly -- or more than 60% of our electricity production from such sources. In the first quarter, we generated 2.7 terawatt of electricity -- terawatt hour of electricity and also 1.32 (sic) [ 13.4 ] petajoules of heat. Our production went down in terms of electricity, especially at PKN ORLEN at -- down 20% (sic) [ 10% ], mainly due to the CCGT shutdown at Plock. But we saw also a demand for conventional electricity.

Our renewable sources of energy went up because we saw another project brought onstream, and we are expecting that our zero emission energy generation will be developing strongly, not only based on our existing sources, but also based on our acquisitions, because we are planning more acquisitions in the future.

Our electricity sales went down by 9% year-on-year, mainly due to lower sales in wholesale because we had to optimize our portfolio, as well as lower consumption of business customers due to the COVID-19 pandemic.

The electricity distribution went up, and it is fully realized by Energa Operator. It went up by 2% year-on-year, mainly due to an increase in remote work during the pandemic. We also saw a noticeable trend of increasing capacity of renewable energy sources connected to Energa Operator's grid.

CO2 emissions in the first quarter of the year stood at 2.4 million tons.

And other highlight of the first quarter included the fact that PKN ORLEN signed a contract with Northland Power for the construction of the wind farm on the Baltic Sea. The investment is expected to start in 2023 and brought onstream in 2026. It is a very important, a key investment from the perspective of our group.

We also secured the approval for the acquisition of 3 onshore wind farms in the Pomeranian region at nearly 90 megawatts in terms of capacity. And all in all, we will have 353 megawatts of energy installed in wind power, and we will become the fourth biggest player in this market.

The next segment I'd like to discuss is Retail. In the first quarter of the year, the LIFO-based EBITDA stood at PLN 548 million, going down by 22%, mainly due to the volume effect on the back of the situation in the market, the pandemic. Sales volumes in retail stood at minus 13% -- went down by 13% year-on-year, of which gasoline down by 15%, diesel by 11% and LPG by 17%. The effect on margins was negative, mainly in Poland and the Czech Republic, going down in these 2 markets. However, this was offset partially by higher margins in Germany, but it was also comparable year-on-year in Lithuania.

In terms of nonfuel margins, it went up -- they went up in Poland year-on-year, especially in terms of hot beverages and drinks and drinks and food, same for Germany. And in Lithuania, they stayed flat.

In the first quarter, we also developed our network in terms of the alternative fuel points. We currently have 225 alternative fuel points, doubled the figure from last year. And we consistently support the growth of Polish economy because we keep our partnership with Polish producers. Right now, more than 85% of products sold at our service stations were produced in Poland. This is obviously good news for our entrepreneurs in the Polish market.

Slide #17 continues to discuss our operational data for Retail. At the end of the first quarter, we had 2,856 fuel stations, of which 65% has the Stop Cafe concept. The number of fuel stations went up by 20% year-on-year across all our markets, with the exception of Germany.

Due to lower consumption of fuels and demand for fuels, the Retail section, our Retail segment went down in terms of sales volumes by 13% across all our markets. And the same applies to our market shares which went down across all our markets, except for Slovakia, in which we consistently are expanding our position.

The dynamic increase in nonfuel offering is worth stressing. We had 2,229 coffee corners, going up year-on-year. We are also increasing our -- and expanding our alternative fuel portfolio. As I said, at the end of the first quarter of the year, we had 225 alternative fuel points going up year-on-year, especially in Poland, going up by 202 -- 102 and in Czech Republic by 72 and Germany as well. We had 144 EV charging stations and the rest in the Czech Republic and in Germany. We also have 2 hydrogen stations in Poland and 32 CNG stations in the Czech Republic.

The next slide presents the next segment, our Upstream segment. In the first quarter, the Upstream segment reported LIFO-based EBITDA at PLN 14 million, going down by 94% year-on-year, which was obviously due to the negative macro impact due to cash flow hedging transactions, going down by PLN 17 million. In the first quarter of the year, we also saw a positive impact of hedging transactions going up by PLN 100 million. But this year, the effect was different. It was the opposite.We also saw an impact of gas itself and condensate as well as crude oil.

In the Upstream segment, we saw a decline in sales due to a decrease in average production by 400,000 barrel of oil equivalents per day in Canada, combined with a higher production Poland.

Others, the position others mainly includes the lack of provision reversal for tax liabilities related to the purchase of FX Energy and Upstream, the companies acquired in the segment.

The next slide discusses some more operational data. We now have 164 2P total reserves of crude oil and gas, and the average production in the first quarter stood at PLN 16 million. And the CapEx was broken down into 80% for Canada and 20% for Poland.

In terms of our operations in the first quarter, I'd like to highlight the main the milestones in Poland. After we commenced the production in the Bystrowice, Miocen project, we started the start-up of surface installation. In the Edge project, we continue the development of the Tuchola and Bajerze fields based on the generation of electricity from nitrogen-rich natural gas. In partnership with PGNiG, we continued works, both project and legal works, for the development of the Plotki project at Chwalecin, and we also continued administrative works for the gas field. We also continued drilling on the Bystrzek-1 well, but we discovered no gas deposits there, and we decided to abandon the well. Our seismic activity -- the seismic acquisition -- data acquisition at Koczala continues and were continued. And the Karpaty project, we had the interpretation of 2D seismic profiles, and we started also the cartographic works.

In Canada, we continued the works in the Ferrier, Lochend and Kakwa area.

Thank you for your attention. This will be all in terms of my detailed discussion of our performance by segment. And we'll now go back to the financing muscle, and I'll now give the floor over to Mr. Jan Szewczak.

[Jan Szewczak, executive]

On Slide #21 gets us back to the cash flow and the financial data. In terms of our cash flows from operations, they stood at nearly PLN 4 billion, specifically PLN 3.9 billion, with the demand for working capital going up by PLN 300 million. You will see the breakdown in terms of our cash flow from operations. You will see the CapEx figure, but the CapEx at minus PLN 1.8 billion, but you will also see the PLN 3.7 million in terms of the net outflow from investments.

In the first quarter, we saw a PLN 2.4 billion in LIFO-based EBITDA, the figure that makes us very proud. And the LIFO effect was at PLN 1.1 billion and working capital at PLN 300 million and CapEx at PLN 1.8 billion. And we spent CO2 emission -- the spending on CO2 emission allowances and certificates at PLN 1.2 billion. So you could only imagine what the figure would be like if we had bought them at market prices at -- we acquired them at 24 and not at 48, the figure that stands today. You can imagine how -- what the burden for Polish companies is right now in terms of the energy restructuring process.

Slide #22 concerns our financial strength. We can recapitulate the slide by saying that despite a relatively slight increase in our net debt going up by PLN 400 million, we are still on the safe side. And the indices in terms of our debt are on the -- are stable and well controlled, not only by PKN ORLEN itself, but also by our auditor. Our net debt stood at -- at the end of the first quarter stood at PLN 13.1 billion. And what is important for us in the context of our relations with our financing institutions in the bank, the net debt-to-EBITDA covenant, went up reaching 0.91 compared to 1.27 before. Of course, this is a relatively -- of course, we had a relatively small increase in debt, mainly on the back on our high spending on investments at PLN 3.7 billion, as I mentioned before. And we have to also remember the fact that we had to pay for our leases and interest.

As you can see, however, and you will see on this slide, these are negligible -- not negligible, but that they are not very high, those figures. So we are safe to say that our financing sources are well diversified, and we will keep diversifying them. We're still looking for new sources of financing. You will see that in the bottom of this slide, we also extending our maturities. And the average maturity is currently at 2023. And the currency structure of the debt also reflects our currency exposure in terms of our operations, but it also creates a natural hedge.

You will obviously see certain fluctuations in terms of the foreign exchange rates of PLN versus the main currencies. In the first quarter, as part of our issue, bond issue project, we had the next issue of our ESG-based bonds at PLN 1 billion with a 10-year repurchase period or redemption period. This, I believe, is very important to us in terms of the security of our growth projects. We keep looking for new sources or investments. And we, for instance, we want to introduce the cash flow into the structure. In Poland, it is not as used as it is around the world.

Slide #23 presents our CapEx and spending for the -- in the year broken down by -- into ORLEN and ENERGA, of course. We are planning to spend PLN 5 billion on growth and PLN 4.5 billion on maintenance. And it's very important because, for decades, for a long time, it was not watched over. The condition, the technological condition of our process lines were not very watched over. Only in recent years we have been focusing on maintaining the technological condition -- good technology condition of our process lines, also as to avoid unexpected and unplanned maintenance shutdowns which can obviously affect our performance.

The CapEx realized in the first quarter of the year was at PLN 1.8 billion, broken down into the Refining segment, PLN 0.4 billion; and the Petrochemical segment, PLN 0.5 billion; nearly PLN 0.4 billion in the Power Generation segment; PLN 0.3 billion for Retail; and PLN 0.1 billion for Upstream. The main growth project realized in the first quarter of the year. In the Refining business, we had the construction of the Visbreaking unit at Plock, and we also had the construction of the polypropylene glycol in ORLEN Poludnie in Trzebinia. The extension of the olefins unit at Plock in terms of Petrochemical business was the key project. We're also extending the fertilizers production capacities at Anwil, and we're also constructing the DCPD unit used for the production of specialized fertilizers at Unipetrol.

In terms of Energy the apple in our eye and for the future, as I said before, we will have the -- we have the offshore wind farm project on the Baltic Sea which was launched and also the modernization of current assets and connection of new clients in ENERGA Group as well as the development of EV chargers network. As I said before, we launched 13 new stations.

In Retail, we opened 8 new stations in the network. We closed new stations and modernized 3 stations. And we also opened new Stop Cafe/Star Connect locations, 11 of them were opened.

And last section of the presentation, we'll focus on our macro environment. And I'll now give the floor over back to Mr. Zbigniew Leszczynski to discuss the macro environment.

[Zbigniew Leszczynski, executive]

We have summarized the results of the first quarter of 2021, and we also discussed partially the macroeconomic environment that PKN ORLEN operates in. I will now focus on the short discussion of our macro environment in the second quarter of the year, which has already started. I will present our perspectives and outlook for the second quarter in the context of the data we keep collecting for our business in general. This data makes us optimistic. It makes us optimistic, and we can say that quarter 2 will be a good quarter, a solid quarter for us as well despite, as we know, the very challenging situation the whole world is coping with right now. I do believe we can still fare well and generate solid results. The main parameters I'd like to discuss at this point in terms of our macro environment is the model downstream margin in the second quarter of 2021. I -- it has already been up by USD 3.6 per barrel quarter-to-quarter to USD 10.9 per barrel, mainly on the back of the higher differential -- Brent/Ural differential and also higher petrochemical margin.

Moving on to crude oil price. It went up by $3 per barrel quarter-to-quarter at $64 -- to $64 per barrel, mainly on the back of lower sales of fuel oil -- of crude oil in the U.S. in terms of the price and in terms of inventory, going down, as well as the forecast for higher demand for crude oil around the world.

In terms of our crack margin for diesel, it is stable quarter-on-quarter at USD 32, on average, per barrel -- per ton, mainly on the back of lower inventories in the Arab business and combined with imports from Asia and continuing low demand in Europe due to the COVID-19 pandemic. The crack margin on fuel -- on gasolines went up by 2% quarter-on-quarter, standing, on average, at $150 per ton, mainly due to an increase in sale -- in exports to USA. In terms of heavy fuel oil, the margin went down to $133 per ton, mainly due to high availability of HSFO in Europe and the inflows from Russia. The differential, Brent/Ural differential went up by USD 1 per barrel to reach the average of $2.5 per barrel, mainly on the back of higher availability of competitive fuels.

However, the petrochemical margin is record-breaking, going up by EUR 427 per ton quarter-on-quarter. And the figure we are seeing is an effect of higher price of polymers due to low inflows and low supply of the products.

The next slides present the more -- some more macro parameters, Slide #26. Standing with -- starting with Brent crude oil, we expect the crude oil price to increase in comparison with the average from 2020, mainly due to the forecasted strong demand growth on fuels in the second half of 2021. In the period from March to mid-August, we saw a high -- record-high growth in the global demand for crude oil, going up by -- going up solidly to $69 per barrel. In the end of -- around the end of February, we saw certain forecasts for the global -- for the increase in global demand for crude, going up by over 5 million barrels per day. It is impossible offset that effect without reduction of production by Saudi Arabia which is expected to go down by 2 million barrels per day. We also expect to continue that Brent/Ural will stand at $65 per day -- of barrels per day. Therefore, Saudi Arabia's decision to maintain the unilateral reduction in production was a surprise for the market, combined with the increased benchmark to the level of $70. The third wave of the pandemic and the restriction on economy -- in economic activity sustained the growth, and we saw an effect in terms of the Brent crude oil price.

The refining margin -- in terms of the refining margin, we expect an increase in the refining margin versus 2020 as a result of economic recovery after COVID-19. We are mainly expecting in the second half of the year, and we have already seen certain signals from the Polish market. The refining margin still remains under pressure in terms of the production surplus, currently estimated at a level of 4.2 million barrels per day in 2020 to 2025. By the end of the first quarter '21, we saw production capacities being reduced and announced to be reduced, mainly in the U.S. compared to the rest of the world. In Europe, the actual and announced reduction applies only to 5 refineries with the capacity of around 400 per day. We still are looking for the reductions -- more reductions to be introduced.

In terms of Brent/Ural differential, we are also expecting increases versus the previous year due to higher availability of Ural oil. We will also see production surpluses. We'll be looking at exports of crude instead of exporting fuels.

In terms of petrochemical margins, we expect those margins to remain at the average level of 2020 at around EUR 800 per ton. And petrochemical business is obviously strictly correlated with the country's GDP, which obviously went down sharply due to the pandemic. However, we are now observing very high margins on polyolefins as a result of limitations on surplus -- on supply, including poor macro environment in the refining business. Therefore, we can count on the Petrochemical segment to generate solid results in the future. In the short term, the petrochemical margins and refining margins will be affected by fluctuations in terms of the prices and in terms of demand and supply.

We are expecting an economic revival in the second half of the year, especially in Poland. In terms of regulation, we need to remember about the National Index Target which went up from 8.5% to 8.7%. However, we can -- ORLEN will be able to take advantage of the possibility to reduce that ratio of the NIT to 5.7%. Therefore, the costs will remain flat compared to our last year's costs. This is very good news, and this is very good forecast for the future, so we can optimistically look into -- optimistically, we can look into the future, and we know that we can say that we'll remain generating solid results also in the second part of the year.

[Joanna Zakrzewska, executive]

I believe we can now move on to the second part of the conference, in the Q&A session. And I'm looking at the questions received in the meantime, and let's say that 2 subjects have dominated the pool of questions that we have received. The first question concerns wind farm projects, both onshore and offshore, and the second part of the question is Polska Press, obviously. Those are 2 business-related questions, so we can start with the first one.

A couple of weeks ago, we had the meeting with a number of companies who would like to participate in the value chain -- in the supply chain. How many Polish companies you're expecting to join this project or these projects? And what will be the spending that you're expecting to have related to the offshore wind project? This is one of the questions concerning wind power projects. We received a number of questions, including the cleaner energy portal.

[Zbigniew Leszczynski, executive]

Thank you very much for those questions. I'm not surprised that you are so interested in -- especially offshore wind power project. At PKN ORLEN, it is very important. This is a flagship project for us, and we attach a great weight to it. As Mr. Szewczak has mentioned before, we keep heavily investing. We are growing dynamically in this area, and we are investing into our future this way because this is an investment of the future for us as well. And we can bet that, even in the short term, it will increase and improve our financial performance. And it obviously fits well within the strategy of building a multi-utility group and also a zero and low-emission group.

Therefore, we are focusing on this project. It is progressing as planned. It is progressing dynamically. And in December of 2020, we had a series of meetings with over 200 companies interested in cooperating in this area with PKN ORLEN. This is a large-scale investment. This is a proof that a number of companies wanted to cooperate with us in the supply chain.

However, this is not the end of our efforts in this area. We keep planning on more meetings for every -- for each segment of the supply chain. We work dynamically. And as part of the first part of our efforts in this area, we continue to maintain a dialogue with all suppliers. Right now, we're not yet able to give you any precise data in terms of the cost of the project. However, we can give you an estimate. The entire project, Baltic Power project, should cost us at around PLN 10 billion. And the Baltic Power project, as I said before, is in advanced stage of preparations, both in terms of formal questions, administrative questions and strategic and business decisions. As I said before, we launched the construction of -- we plan to launch the construction of wind farm project in 2023 and to finish it in 2026.

To date, we have had 2 major milestones. First of all, we signed a connection contract, a grid connection contract with PSE, and we signed an important for us -- an important contract with our business partner, Northland Power of Canada which, after having received an approval from the anti-monopoly office was finalized at the end of last year -- at the end of March of this year. We started in Choczewo geological land examinations and studies in order to review the area for the route of the connection, the future connection, in order to lay an underground piping from the sea -- leading from the sea into onshore stations. We also closed the preliminary studies in terms of the seabed, and we are awaiting the environmental decisions. After we have received and secured environmental decisions and permits, we will apply to have a building permit.

I can add at this point that we are also carrying out -- we're also conducting wind force measurements on the -- windiness measurement on the Baltic Sea. And this will -- this data will be transferred and provided to our business partner, Northland Power. As Baltic Power, we applied to the Energy Regulatory Office as part of the first phase of this project.

So all in all, this is a major project for us, a flagship project. It is progressing as planned. We are on the right track. We have had already -- we have already received approvals, and we have already had 2 major milestones, and we are expecting this project to progress as planned.

[Joanna Zakrzewska, executive]

A couple of questions now on Polska Press, starting with the question on the status -- of the current status of the acquisition of Polska Press. In the context of the recent decision by the court and the recent statements by the Ombudsman and also the President of the Competition and Consumer Protection Office and also a question from [ Mr. Drabik ], what are the investments that you are planning in the Polska Press project in the months to come? Why did you have changes in terms of the composition of the [ parcel ] of certain newspapers and magazines despite the fact that Mr. Obajtek had promised that there will be no changes?

[Jan Szewczak, executive]

Right now, we have secured legal opinions of renowned advisers and law offices. And the conclusion is as follows, and it is in line with our conclusions in terms of our legal officers and also the management Board. The conclusion is as follows. It was in line. The transaction was in line with the law of Poland -- with the laws of Poland, with all the regulations upon receiving the approval and the concentration clearance. And we believe and we are deeply convinced that the fact that the acquisition took place on the 1st of March of 2020, that was before the court issued a decision we have talked about before and -- to suspend the progress of the project.

We believe that this decision by the court is ungrounded, and it will -- it does not affect our work, and it does not affect the legality of the acquisition. Both in our opinion and our legal experts' opinion, the decision of the court will put no limitation on PKN ORLEN in terms of our ownership rights in terms of Polska Press and despite the fact that the Ombudsman applied to the court that caused the court to issue that decision. However, we are not under any obligations to follow that decision.

We had a number of surprising media coverages by a number of journalists. In terms of also the valuation of Polska Press project, they forgot, for instance, to add certain cash values that we had to take into consideration. And this is why we had to pay those companies, including their cash at hand.

In terms of our growth, we have a number of concepts to look at. We're -- we keep looking at it. We're working on it in terms of how to include and incorporate Polska Press within our marketing and growth and communication strategies. We had a meeting between Daniel Obajtek, with the representatives of employees and trade unions. It was a good meeting, and I do believe that we have to be patient. But we feel to be an owner of Polska Press, and you will see that we will manage Polska Press effectively. And you will see for yourselves that the decision will have a great impact on our performance, just as ENERGA. You might remember and you surely remember the reservations that a lot of complainers had.

And right now, we can say that our Power Generation segment is a very important segment for us in terms of its contribution to our performance in terms of net profit and how future-oriented this and forward-looking it is for a huge company as ours, for a huge multi-utility group as ours. And I do believe that the same will apply to Polska Press to the acquisition that we decided to make. I do believe that the sentiment is -- should not be as heated as it is. And with time, you will see that the decision was a good one and a very well-founded one.

[Joanna Zakrzewska, executive]

A question to Mr. Leszczynski. Let me recap a question by Bartlomiej Sawicki, representing Biznes Alert, with other questions concerning wind farms, offshore wind farms. And Mr. Sawicki refers to the plan to develop those areas, the plan adopted by the Council of Ministers. Will you apply to more approvals and permits for offshore wind farm projects?

Mrs. [indiscernible] representing the [indiscernible] Portal, also refers to wind farm projects but onshore projects. Her question is as follows: Will you acquire or plan to acquire or build any more onshore wind farms?

[Zbigniew Leszczynski, executive]

Thank you very much for those questions. We have discussed some of it in the presentation, but let me recap that information for you again and present it to you again. Indeed, starting with offshore wind projects. The Council of Ministers adopted the plan for development of offshore wind project. This is a good decision for this business in Poland. As we said, offshore is one of the main pillars of the strategy adopted PKN ORLEN until 2023 and also one of the main elements of the plan for transformation of PKN ORLEN into a multi-utility zero and low-emission corporation. We are gaining experience, and we want to use it and more investments to come. The experience we will gain at the Baltic Power project. Based on that, we will be able to apply for more licenses for the Polish part of the Baltic Sea.

So all in all, yes, we will keep developing our footprint on the Baltic, expanding our footprint on the Baltic based on the decision and the plan adopted by the Council of Ministers. We are now experienced based on our Baltic Power project, and this will be -- still one of the pillars of our strategy, and we'll keep developing it.

In terms of onshore projects, as we have discussed in the presentation, we have recently acquired 1 onshore wind farm, but we are also planning to acquire 3 more wind farms in the Pomeranian region at the total -- with a total capacity of around 90megawatts energy. And after the transaction, PKN ORLEN will have the total of 353 megawatts of energy in the wind power business in Poland. This will expand our footprint, both offshore and onshore, and we will keep doing it. Obviously, we will take a watchful look. We'll keep taking a watchful eye -- keeping a watchful eye on the opportunities in terms of more M&A acquisitions, but we're also expanding our capacities.

The one example is [indiscernible], the project that we have taken over, but this will obviously not be our only investment in this area. We're very much ready to have more investments in terms of wind power.

[Joanna Zakrzewska, executive]

So Sawicki, representing Biznes Alert, also asks about our assets in Canada. Other question is very simple, but very straightforward: Are you planning to sell any assets in Canada?

[Jan Szewczak, executive]

So the question is simple, but the answer might not be. Well, it's not that simple as it seems because there is many big corporations around the world right now who are looking at this issue. Companies are thinking, and -- on this difficult decision. Of course, this will all depend on the stabilization of the market and defreezing of the economy, the rebound of the demand, obviously, especially in terms of tourism, especially on aviation business, which was practically frozen around the world. But obviously, we want to -- we want our assets to be the self-supporting assets, especially in the context of the mergers we are planning with Lotos and PGNiG. So we need to make sure that our assets are sustainable, and they are developing in a sustainable manner. So I believe that only after the mergers we could take a conclusive decision. This is -- this question is premature at this point. But let me stress again, we are analyzing it. We are looking on our assets -- Upstream assets closely and also in the context of the -- involving the situation around the world.

And the question of PGNiG is also a question that should be asked because in the public -- because the public asks about it as well, so I guess that we should develop on it as well. This is a very important issue for us because this is a question of building a major multi-energy group in Poland, irrespective of Lotos, obviously, which is taking place in parallel. I do believe that the European Commission's decision to move this application to the President of the Polish Competition and Consumer Protection Office or Authority, the fact that the competency in terms of decision-making was moved to the Polish authority is a proof that this is a professional approach, first of all. And also, it comes from the fact that the planned concentration will not, in any way, affect the competition in -- outside of Poland.

In Poland, I believe that the most -- the best authority to take those decision is the office that we have mentioned, the Consumer and Competition Protection Office. And I do believe that this will be the most efficient decision-making in terms of the assessment of this merger. I do believe that the European Commission's decision is a major milestone for us towards the clearance -- competition clearance to merge with Lotos and PGNiG. And I do believe that there will be no -- there can be no strong multi-utility group with a European or even global impact and footprint without the merger. We are competent enough to manage that project and continue that project. We are currently working on the formal application to be submitted to the Polish Competition and Consumer Protection Office to the President of the office to clear the concentration. This, I believe, will be yet another milestone for ours after the acquisition of ENERGA and after the merger with Lotos. I believe, and I'm deeply convinced that this will be of major importance for the strength of the Polish economy and for Poland.

[Joanna Zakrzewska, executive]

I'm watching the time here, and this is why I would like to thank you very much for your participation. I do hope that we will shortly go back to normal, and we will also go back to our traditional format of conferences. But still, thank you very much for you to watch us online, to listen to us online. I'd like to thank to Mr. Zbigniew Leszczynski and Mr. Jan Szewczak, members of the Management Board. Thank you very much, and see you next time.