PGNiG: Regulator approves PGNiG’s tariff reduction proposal (positive)

Poland’s energy sector regulator URE has approved PGNiG’s tariff motion, which includes a 10% reduction in retail gas costs and a 2-4% reduction for industrial users. The new tariff will be implemented from 1 January 2013 and will remain in effect until 30 September 2013.

We had been tempted to see PGNiG’s proposal for a 3.3% cut as overly conservative and thought the regulator would reject the proposal and request a deeper cut. (We had expected around 7-9%.) However, the rather unusual comment from Poland’s PM Donald Tusk – he said “with nearly 100% certainty you can say that the motion submitted by PGNiG will be accepted by URE” – admittedly added an extra twist to the story and weakened our argument. Combined with the roughly 20% price reductions from Gazprom (cited by Poland’s Treasury Minister Mikolaj Budzanowski), this lower-than-expected tariff cut essentially means that PGNiG will receive another massive double-digit tariff increase this year.

We calculate that the lower-than-forecast tariff cut may add around PLN 550m to PGNiG’s 2013 EBITDA, bringing our full-year estimate to roughly PLN 6.8bn, or 9% above the Bloomberg consensus. Although PGNiG’s stock was up 2.67% on the previous day and has risen 30% in the last two months, on a 2013F EV/EBITDA of 5.7x the firm still trades at a roughly 25% discount to the historical valuation (7-year average).