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Edited Transcript of ENG.WA earnings conference call or presentation 15-Nov-19 10:30am GMT

Q3 2019 Energa SA Earnings Presentation

Gdansk Dec 2, 2019 (Thomson StreetEvents) -- Edited Transcript of Energa SA earnings conference call or presentation Friday, November 15, 2019 at 10:30:00am GMT

TEXT version of Transcript

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Corporate Participants

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* Jacek Koscielniak

Energa SA - Vice-President of the Management Board for Finance

* Marek Kasicki;Energa Operator Co.;Vice President of the Management Board (Financial Matters)'

* Mariusz Wojciech Gajda;Energa Wytwarzanie SA;Vice President of the Management Board

* Piotr Dorawa;Energa Obrót;CEO

* Piotr Meler;Energa OZE;CEO

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Conference Call Participants

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* Pawel Puchalski

Santander Brokerage Poland, Research Division - Head of Equity Research Team

* Piotr Dzieciolowski

Citigroup Inc, Research Division - VP

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Presentation

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Unidentified Company Representative, [1]

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Good morning, ladies and gentlemen. Welcome to this conference of Energa Group.

We're going to discuss the results for the third quarter of 2019 and performance after 9 months of this year. The presentation will be held by Jacek Koscielniak, CFO of Energa Group, supported by Marek Kasicki of Energa Operator; Piotr Dorawa, CEO of Energa Obrót; and Piotr Meler, CEO of Energa OZE.

You're welcome to ask questions as of now through the Internet application. And a warm welcome to all the participants online.

Dear President...

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Jacek Koscielniak, Energa SA - Vice-President of the Management Board for Finance [2]

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Thank you very much. Good morning, ladies and gentlemen. A warm welcome to this conference, results conference. We're very happy to see you on a regular basis and in a transparent way -- and inform you in a transparent way about the most important events in Energa Group.

We know that we have a tight schedule today because there is a number of conferences result-wise for many companies, also including energy companies. I -- this morning, at 7 -- around 7, we published the financial report for Q3 this year after a review by the auditor.

Ladies and gentlemen, I'd like to open this meeting by a brief introduction regarding the situation in the market. Generally speaking, as you can see in the slide, on your left-hand side, there's a lot of growth and on your right-hand side even more growth. These mostly relate to solid fuels, prices of hard coal, green certificate prices, emission allowances prices for CO2 and domestic production of energy, electricity, rather the spot energy prices and domestic consumption of electricity. And ladies and gentlemen, you can see that we are work -- again we continually work in a very difficult business environment and in a very difficult regulatory environment. Regardless of these difficult conditions, EBITDA is at a good level. We have a satisfactory level of EBITDA.

We have a 10% growth year-over-year. I would say that this macro EBITDA, this is what we could call this. And after clearing out, it would be around 7% year-over-year after adjustments. Negative impacts of impairment losses, that has been discussed on many opportunities in this hall and in our internal meetings. And during our meetings with you where we have informed you transparently about what we've been doing, we've been holding workshops to inform you on these issues, and we would like to continue according to that trend.

The 9 months and Q3, we produced less energy year-over-year. And generally speaking, was pleased, know that RES energy has grown, respectively, by 9% and 5%. The distribution volume has been reduced insignificantly, mainly in group A, because energy consumption was limited in one of the clients. In the next part of this conference, we will discuss in detail the results for particular business lines.

Ladies and gentlemen, now speaking about the most important achievements business-wise in the last 9 months of 2019. We are geared towards a continued investment in modernization and investment in projects on the network, mainly in terms of distribution. In the first 9 months 2019, we -- PLN 945 million was the CapEx investment, plus 10% year-over-year. We completed the modernization of a hedge -- high-voltage line, Janiszew-Adamów, 12.6 kilometer long. We connected 5,000 micro installations for RES in Q3, standing in 34.5 megawatts, in Q3 only.

And in the 9 months, in the past 9 months, the total number is almost 29,000, 140.5 -- 147.5 megawatts all together. Please note that, in the last 9 months of 2019, we built 128 kilometers of network connections of medium voltage. We replaced 662 kilometers of lines and connections regarding low voltage. We replaced overhead lines for -- into semi-insulated cables at the section of 490 kilometers all together. So our priorities are cohesively implemented. As well as one of the important things is the improvement of efficiency ratios, indexes, above all, and better efficiency of electricity transfer.

In terms of generation production, we have modernized the Galaznia water energy plant, 4.25 megawatts. We also received the environmental decision, and we filed a motion for the 19.8-megawatt investment project. We already received the permit for PV Gryf project. We are cohesively geared towards investment in renewable energy sources. When in terms of Przykona 31-megawatt wind farm, everything is according to the schedule. And we're counting on having first tests in the next year, but the details will be discussed by my generation colleagues.

And ladies and gentlemen, in terms of Sales Business Line, we've been investing in automated client service. We have continued the implementation of modern solutions for clients, including among others a new policy, a soho policy, for small business clients including building a product offer combining electricity with additional benefits in the form of products and services for the clients. We've seen an increase in the number of PPEs and a higher pace of growth in contracting electricity sales for the future years versus last year. Again we've been using and developing the Internet channel, the e-channel, and Internet-based remote channel.

Our priority, ladies and gentlemen, is care for the environment. As you can see in this slide on the screen -- oh, there it goes, yes. Sorry. I don't see the slides really. We pay a lot of attention to limiting CO2 emissions, greenhouse gases altogether. And this has already been discussed, including at the previous meetings. And also our strategy modifications will be implemented based on this approach for the next years.

Key investment projects now. Przykona wind farm, as already mentioned, located in the center of Poland. And the former coal mine in Przykona. Foundation works for all generators have been completed. And in early October, the installation of turbines was started, as well as Przykona and Zuki stations began then. Also, medium-voltage cable line has been constructed. We are introducing full generators, wind power generators. And in early December, we're planning for first launch tests. In early 2020, we're planning on completing the works so that we can receive a permit for operation in the first quarter 2020.

Talking about Ostroleka C power plant project. It's according to the schedule. The project is a difficult one in terms of implementation because very modern technology is required. Due to that, on an ongoing basis, the steering committee, in cooperation with the general contractor, have been discussing and are discussing all the progress on the project. And we can see that the project is surfacing step by step. The groundwork, the foundation work has already been carried out. And currently, a deep work and foundational work for the main facilities is being continued for the power plant. Also, we are completing the unit construction stage, and we have already acquired all the permits.

CCGT Grudziadz project, the gas-fired power plant. We are at the stage of acquiring an investor for the project. We have completed the competition dialogue with the bidders, and we are currently getting started for preparing the terms of reference for the project. The company, the SPV, have all the intent letters that are necessary from the consortium of banks that are interested in debt financing of the project.

Energy storage facility in Bystra. This hybrid battery energy storage system has entered the last stage of construction. Containers with the batteries have been shipped, and that's the final element of the installation of the facility. This is the biggest facility of this kind in Poland. It's one of the biggest worldwide. Currently, the battery sets are being installed in the warehouse unit, and the storage will be launched in 2020.

Now in terms of details, Energa Group in the 9 months of 2019.

We've seen a high growth in income, plus 19% year-over-year. It's mainly a result of energy prices increase on the market and the recognition of difference in income for the first half and the compensation, financial compensation, for Q3 this year, standing at [PLN 393 million] altogether, which is supposed to compensate the losses stemming from the energy prices bill. This will be discussed in detail by my colleagues of the business line -- Sales Business Line.

We've seen a net result under a big reference -- influence of one-off situations. That is the reversal of impairment loss on wind farms in Q2 2018, standing at PLN 117 million, impacting plus PLN 95 million the net result; and the recognition of impairment loss on assets in Ostroleka B in Q2 2019, standing at PLN 270 million. That had an impact of minus negative PLN 219 million. That was all reported to the market.

Now moving to the structure, the EBITDA structure of the group. Traditionally, the biggest share is held by distribution, 75% in the 3 quarters, 68% in Q3 2019. And generation and sales, 13% and 15%, respectively. Incrementally good results for sales were noticed due to big one-off events stemming from using a provision created in 2018 and also the effect of improvement in results multiplied by a low base of the previous year. The energy prices act in 2019 had no negative impact on the result of this line in the current period.

Generation Business Line for 9 months has been stable regardless of the increasing costs of fuel, generation and higher prices of permits. As I said in the very beginning of this meeting -- and details will be discussed on next slides.

Now let's talk about Distribution Business Line. And let me hand over to Marek Kasicki so he can discuss the details of the results.

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Marek Kasicki;Energa Operator Co.;Vice President of the Management Board (Financial Matters)', [3]

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Thank you, President. Good morning.

Slide entitled Results of the Distribution Business Line.

You've got a bird eye perspective of Q3 related to the last 9 months. Lower EBITDA results here and slightly lower by 3% after the passage of these 9 months. Now regarding EBITDA for Q3, truth be told, it was [all deterred] by a lower margin on distribution connected to lower costs of energy sold for the compensation of grid losses. Details will be provided via further slides.

Now speaking about the volume. As my fore speaker accentuated, we experienced an outflow of many recipients in favor of their own generation sources in Q3. We took a note of a lower generation of the [SAS group] all connected to weather conditions. It resulted in these weather conditions being very much of essence. The average temperature was higher compared to the previous year, and this resulted in this result year-to-year.

There was a number of positive events that have to be taken a note of that leveled down the negatives. What I'm thinking of now, we might jump to next slide. I'm referring to the connection payments, the growth of PLN 15 million year-to-year, if we take a look at 9 months. Speaking of Q3, we are talking about PLN 5 million. Altogether, it was due to connection works but also the inventory of prepayments that have been connected since the very beginning of 2019. What is also worthwhile stressing, we mentioned this at previous events, it's also due to be mentioned now, the very entry into force of the tariff. And this made -- [delayed] 1 quarter later than it had been originally planned and influenced our business EBITDA result.

Just a quick reminder for you. Most of you do remember that in 2018 we counted on a solid results base. And there was indeed a shift in non-invoiced sales. There was an one-off event that boost the results PLN 63 million. And if we were to combine it with what you see here in terms of margin, this is where we are after the passage of 9 months and delivers our -- in analogy, one to another.

Now speaking of OpEx. This position keeps growing year-to-year, and this is what we have observed after the passage of 9 months. What's vital here in terms of a factor was a decrease of discounted rates, something that we also take into consideration when doing our analysis of -- an accounting event that boosted our OpEx for 9 months by PLN 24 million. PLN 18 million as regards reserves and, after Q3, PLN 13 million. So speaking of OpEx: If we were to disregard the analysis of reserves, we would have savings on the operational level, but this is all in all the result of certain activities that were performed in terms of modernization, in terms of repairs and also the management of working hours, which might be shifted either versus OpEx or versus CapEx.

Now moving on. We've got also reliability ratios. And this is -- this comes as a confirmation to all the activities that we undertake within the Distribution Business Line. They come to reflect a certain improvement speaking of this year-to-year perspective in terms of our activities and in terms of ratios. This level that we have accomplished is the result of investment activities run connected to our inventory and the modernization of our grid to the cable ones, the modernization of transformers, streamlining of the grid versus the newer versions. This all speaks in favor of the boost to our reliability. And furthermore, we keep reinforcing these actions by, let's say, organization ones. We do a lot on LV in terms of planning. Much is being done and divulged as regards the planned works. And this technology has been implied up to 95%, and this is one of the biggest accomplishments in [Polskie Sieci El] scale. And moreover, we keep intensifying our works on MV. A couple of years back, just one of our branch could boast about it, this accomplishment. Now most of our branches do precisely this. And this has its -- is a reflection [in the ratios] that you can see behind my back, in the slide.

That's it. Should you have any questions, I am here for you.

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Unidentified Company Representative, [4]

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Thank you, Marek.

Let us delve into Sales Business Line and its results. Piotr, can you tell us more about it?

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Piotr Dorawa;Energa Obrót;CEO, [5]

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Concerning Sales Business Line. This line can boast about a very positive financial results. EBITDA for Q3 is equivalent to PLN 118 million, net profit PLN 78 million, respectively. Collectively speaking, the results as -- are as follows: EBITDA, PLN 258 million, as opposed to PLN 50 million year-to-year; net profit, PLN 161 million. And it is worthwhile saying that we can talk about a stable electricity sales of volume, 5 terawatts per hour, quarterly speaking.

Now moving on to our next slide. This is a detailed summary of subsequent ratios. In the lower part, in the bottom part of our slide, you can see what margin we have on sales of electricity including price reduction, PLN 66 million. The improvement in terms of margin has been influenced by lower costs concerning

(technical difficulty)

rights and lower excise. In Q3, we've got PLN 67 million in terms of compensation that stemmed from the entry into force of an act concerning electricity prices in 2018. Furthermore, we took advantage of some part of the reserve for contracts, giving burdens, a result of [As] and selected tariff, PLN 23 million; and further operational costs equivalent to PLN 31 million. Here we've got a lost litigation at court against our competitor regarding wind farms, but let me tell you in advance this is not [SBA] rights.

Now in the part of the slide we see the bridge for the 3 quarters of the current year collectively. What's most vital is the difference in price and the price compensation which stems from the application of the relevant act, PLN 593 million, as my fore speaker said. PLN 526 million pertains to the first quarter of the current year. Fresh info is that our motion and our application has been recognized. Therefore, we are now awaiting money on our accounts. That is basically it. That's a very positive news indeed, well, ameliorate our cash flow results. That's for sure. The price act keeps being neutral versus our performance.

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Unidentified Company Representative, [6]

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Now as regards Generation Business Line, Dr. Meler is going to take the floor on this spot.

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Piotr Meler;Energa OZE;CEO, [7]

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As President Koscielniak mentioned, what's seen in our case is a stable EBITDA level, slightly lower compared to the similar period last year. This period was not too easy, chronologically speaking. We had to combat the results of the [drought in the southern point]. Therefore, the works of Wloclawek, the performance of Wloclawek was not as expected, but when it comes to the results of the first months of this year, RES could generate more by 9%. It was mentioned. And we are comparing this periods year-to-year, so we've got the stability in terms of RES, thanks to wind, thanks to solar power. And this is all to reflect a situation that our EBITDA is stable and our revenues are stable as well.

Ostroleka's performance is slightly poorer compared to the past periods, but all in all, as regards our business line's results, PLN 226 million EBITDA for 9 months of this year and PLN 234 million; and PLN 66 million to PLN 54 million. What we want to stress also is a huge accessibility of our sources. Their availability are there at a level of 90%: 94%, 97% on average for some facilities, as a wind farm in Parsówek composed about 97%. Therefore, we are ready to take advantage of proper weather conditions either in terms of wind or water.

We are capable of manufacturing at maximum, at full speed, at full steam. And this is clearly to show the quality of these generation sources, on the one hand; and on the other hand, how capable we are in terms of their modernization and maintenance. And indeed we could, might be happy about wind condition, about windiness. And it came to compensate the Wloclawek poorest performance. And our biomass unit was also of essence; and therefore this manufacturing, this generation level is proper.

We want to speak highly about our development. As President Koscielniak said, this RES area is something that comes to be our pride. Look at Parsówek wind farm, something that was commissioned in 2017, 2018 and 26 megawatts in capacity. Now we are at the advent of the commissioning of the Przykona wind farm. Should our weather window is there, we will be able to finish off our assembly works. And the capacity is said to be equivalent to 31 megawatts, [how we can see] that this wind part is very massive in our company.

What was also mentioned in terms of building permit. We granted it for PV 20 megawatts, and now we are at the stage of taking part in the prequalification scheme. Should it be successful, we will see. The pace is fast, but on the other hand, we know the expectations are for us to boost the RES share. And I think, [also high] that we can eventually take part in the said auction. What else can I say? For certain, we have seen a much better performance in the part of the Ostroleka power plant.

Fixed costs are higher. That's for sure. That is the second bridge. Let us say a few words about it. Fixed costs are down to the repair of the MV unit in Ostroleka. It had its very significant contribution in this event. Furthermore, we need to mention employees costs which were lower but also very significant at the same time. And there is a certain generation gap that we need to take note of. And we need to compensate for this turnover and in terms of our employees.

And we've got much in our workers force. Nevertheless, we need to get folks prepared for work. We know that there's this transitory period in terms of going into retirement, and therefore we need to have it all happening smoothly. Lower income from electricity sales. This is again down to lower generation and lower costs of allowances for CO2 emission.

Regardless of it all, EBITDA has to be seen as stable now.

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Unidentified Company Representative, [8]

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Thank you very much.

Ladies and gentlemen, investment expenditure, as you can see on the slide, we are pro development in the third quarter. We connected around 50 megawatts of new sources, renewable sources of energy, including 34.5 megawatts from micro generation systems for RES, around 5,000 units. We also invested in innovative solutions, network solutions like the reconstruction of the grid to meet the smart grid system standard, PLN 120 million. And on this kind of investment, including action taken to adapt the grid to environmental requirements, we invested in the modernization of B power plants. We dedicated PLN 26 million on investment work concerning our assets and lighting mainly.

And on a final note, important factors for the group from the perspective of late 2019. Definitely, the prices of energy in the market; and also allowance, CO2 emission prices; as well as hydrological and weather conditions; including also the final energy prices in 2019 stemming, among others, from the bill on the price of energy.

This is the end of our presentation, ladies and gentlemen, but we are at your disposal. We are ready to answer your answer -- and within this group of experts. We're happy to take your questions now, but before you ask them, let me tell you the following.

We are very optimistic in terms of our outlook on Q4 and 2020, although our forecasts have not been published. And we are not planning on publishing such forecasts, yet we are continually looking for space in our balance sheet to undertake investment in renewable energy sources. And the instrument for looking for such possibilities is a radical program for increase of efficiency which is implemented at the group level and mergers of our activities among the groups.

Ladies and gentlemen, the floor is yours. Please ask your questions. We also have questions from Internet users. And I hope that I manage to answer some of them, at least, in this last -- these last remarks.

Thank you very much for the time being. I'm happy to take your questions.

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Questions and Answers

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Piotr Dzieciolowski, Citigroup Inc, Research Division - VP [1]

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Piotr Dzieciolowski, Citibank. I have a couple of questions. First of all, I'd like to ask you about Slide 30 from your presentation and combine it with your financial results for the last 2 years. In Slide #30, you clearly show that the regulated return and revenue, regulated revenue, and depreciation has grown by PLN 150 million. In distribution, the results are flat. So my question is why these better regulated results stemming from the tariff directly do not translate in the results for -- of the segment. That's my first question.

Also, I would like to ask you another one. The drastic restructuring program that the CEO mentioned. What is that about? And could you please put together, if you remember the data, the number of employees, head count on IPO, since IPO; and the average salary. And I'd like to know what is going on in those terms. So are you defending in the -- and what is going on in the market in terms of salaries and the pressure? So what are you doing in terms of head count and salaries?

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Unidentified Company Representative, [2]

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Dear Piotr, let me take your second question, first. So the efficiency increase program is kind of know-how that we have at Energa. It's the know-how that's been worked out by the group of experts that prepared this project. Also, let me tell you that the Supervisory Board obliged us some time ago to launch such a program, and this is what we did and this is now -- has now become reality. So we're looking for space to do that in your balance sheet -- in our balance sheet. I -- your question was too detailed and I can't remember the exact data. Please let me finish my answer.

It's difficult to go so far back in my memory to the IPO and put together the number of thousands of employees and the head count that's current. All that is clearly visible in the financial report. Now how are we going to tackle the pressure that has been out there in terms of salary increase? Well, ladies and gentlemen, let me tell you that we do have a certain action model, and this model is being carried out. We are in the middle of a dialogue with the social partner. The dialogue is a very good one. And as I said, we're also looking for room in terms of energy, in terms of efficiency improvement and manageable costs. So a lot is being done with our own resources.

Outsourcing has been largely eliminated. And to a large extent, we are also carrying out advisory work internally instead of sourcing those services from the market. Of course, there are things that we cannot scrap, taking into account that we have to apply due diligence in the decision-making process of the Management Board of Energa SA, which is being controlled by the Supervisory Board. This is my way of a response to the second question. Now in terms of a comparison of these numbers results, I'm sorry, but I don't remember the data.

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Piotr Dzieciolowski, Citigroup Inc, Research Division - VP [3]

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I see. I understand that the Supervisory Board knows the documentation. And I see a number of shareholders of the company in this hall, and I think it would be very valuable to hear commentary on your part about the numbers in terms of costs that you are going to limit. Is that 1-digit or 2-digit number? And what is the time perspective? So it's not enough to say, "We have a program, but we won't tell you what it's about." Now if you don't want to tell us, I can understand that, but maybe you could explain why the regulated revenue in Slide 30 does not translate into an increase in distribution results.

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Unidentified Company Representative, [4]

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Ladies and gentlemen, in Slide 30, what you can see is part of the methodology. I mean the methodology of building the regulated revenue. And this slide was prepared to give you a picture of what the components are of regulated revenue. This is always prepared at the end of the particular year, so this was agreed on with the energy supervisor at the end of 2019 and in terms -- or rather '18. So in terms of expenditure and planned regulated revenue. Of course, as you know, business environment is changeable. So there might be differences because the situation is dynamic.

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Piotr Dzieciolowski, Citigroup Inc, Research Division - VP [5]

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So the PLN 150 million is -- okay. We've been looking at this slide for the last 5 years, so I think we do understand those things, but my question is in what areas did you lose the PLN 150 million in the last 3 years. Is that a result of losses on the grid? Can you tell us about the performance, underperformance and OpEx in terms of losses on the grid? So the -- what are the elements where these PLN 150 million have been lost?

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Unidentified Company Representative, [6]

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Well, you're talking about -- we're talking about capital expenditure, right?

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Piotr Dzieciolowski, Citigroup Inc, Research Division - VP [7]

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No, I am not talking about that. I'm talking about your P&L. I'm going -- I'm talking about your depreciation and with the regulated EBIT, plus the depreciation, plus the regulated revenue. And I'd like to ask you about this model because it shows clearly that you should have earned an additional PLN 150 million. Most have changed, but I'd like to know what the additional elements are in this light green area that is 2,490 that are differences. So I'd like to know whether you know which elements in the last 3 years acted against the company. So that we can understand why the performance did not reflect the growth in RAB.

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Unidentified Company Representative, [8]

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Well, this is a broad topic. And this should be discussed at a 2-hour-long workshop, which has, by the way, been organized for you in the past. But to give you a bird's eye view: Although we know that this is not a direct relationship one to one how this price translates into these numbers, what you're talking about is you compare 803 to 837; and the bottom -- and then the growth 775, 673, the RAB. And so that's a positive result, if you look at this.

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Piotr Dzieciolowski, Citigroup Inc, Research Division - VP [9]

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And if you look at your results that you reported, it's flat [1,700,000].

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Unidentified Company Representative, [10]

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Okay. Let me go back to this. You are talking about regulated revenue in terms based on the planned expenditure, but these things grow in time in relationship to the planned investment expenditure that was planned in the previous years. This is not being updated. This is a tariff-based model.

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Piotr Dzieciolowski, Citigroup Inc, Research Division - VP [11]

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Did your WRA increase in the last years, in 2019 versus 2016?

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Unidentified Company Representative, [12]

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The answer is yes.

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Piotr Dzieciolowski, Citigroup Inc, Research Division - VP [13]

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Okay. It's grown. So did WACC grow?

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Unidentified Company Representative, [14]

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Yes, did change. It grew.

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Piotr Dzieciolowski, Citigroup Inc, Research Division - VP [15]

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So why is the result flat?

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Unidentified Company Representative, [16]

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Well, because the results do not reflect the regulated model one to one.

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Piotr Dzieciolowski, Citigroup Inc, Research Division - VP [17]

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Okay, let's leave that question if it's so difficult to answer. Well, investment expenditure that was accepted by the URE President have a certain delta. And you and -- were talking about real results, real-life results. And what you see on the slide is a theoretical model, theoretical values, model values. This cannot be referred directly. So the model such as this that you should earn PLN 150 million has no translation on the reality, right?

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Unidentified Company Representative, [18]

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Piotr, this question is very opinion forming. Please note that, if we theoretically take a laptop computer and you introduce data into a spreadsheet file where you have formulas, you will receive an X result at the end. And what we are talking here about is business reality where we incur costs in terms of network losses. Plus, if we take decisions on our own initiative to transfer the system from overhead to underground, that cost has to be covered from our own balance sheet. That's the answer to your question. Next question, please. Thank you, Piotr.

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Unidentified Analyst, [19]

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So if I may, let's continue on distribution since that's your key sector alongside Ostroleka C. The drop in WAC, I understand that that's your outlook on the future EBITDA and distribution is, at most, flat, right? Because flat would mean that you will cope perfectly with an increase in salaries. And radical cuts will be materialized in the next year, right?

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Unidentified Company Representative, [20]

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Well, as I told you in one of the parts of my presentation, as a result, we do not publish forecasts, but we're happy to invite all analysts to our workshops and then discuss the details when we have agreed on the tariffs with the energy regulation office President. We do not publish forecasts. Please leave this decision to the Management Board of Energa SA since the company and the group is at the stage of preparing the plans for 2020. And it's a very difficult task and just as of today and the market environment that we are in to talk about how we organize our business in 2020 not only from the point of view of regulation but also in terms of added value and the capacity of the balance sheet.

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Unidentified Analyst, [21]

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Fair enough. Question number two, also regarding distribution. In terms of volumes, do you foresee the continuation of the trend that started a couple of years back that is the drop in volumes within distribution? This is what I'm asking you now, but the market shows in parallel to this that this trend is to be -- is to stay. Do you think is this going to be boosted? Is this going to be flat? Or is this going to go on?

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Unidentified Company Representative, [22]

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Of course, we stay optimistic vis-à-vis the future. And on the go, we talk about certain events that might influence the volume. Once, we spoke about the withdrawal of one of our recipients under the RES facility. There are certain objective events which may not be foreseen in advance to be considered one-offs. And now referring to Q3, the volume of C energy, which is characterized by significant margins, this was lower year-to-year due to lower temperatures.

On average, temperature was lower by 4 degrees, which translated into a lower use of energy in terms of air-conditioning facilities both for tourism use and the business one. So these are 2 poignant elements that need to be taken into consideration. So in terms of our analysis, this is what we keep an eye on. To another end, this outlook does not take note of the volume for subsequent years. And bear in mind that, volume, we've got these 2 elements.

So this regulatory model in Poland as well as in Europe is shaped in a way for this eligible costs within the Distribution Business Line are translated in a reliable manner to the recipients, but this is also a market play, something to the favor of investors. But this is to be balanced out should a drop be durable because, whenever somebody is shifted to their own generation source, it is in [front] of this character. This model takes a note of it. That's number one.

And number two, our grid is being modernized all the time, and our CapEx on connections is robust. It's automatic that -- it's not automatic that, if something was detrimental this year, it would be equally detrimental in the years to follow because this is all associated with the development of business, with the growth of the business, on one hand, but on the other hand, also it's due to a number of initiatives in our area. And they in turn shape the overall landscape of energy transmission. That's something that we consider also in our talks with the President of the energy regulatory office. And this is furthermore reflected in our focus. And this is to balance out even if cross-out withdrawals are due to happen.

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Unidentified Analyst, [23]

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Now speaking of Generation Business Line, President mentioned in the beginning referring to Ostroleka works, that works regarding design and planning are due to be finished off. Was this a lapse of yours? Have there been any changes, any amendments?

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Unidentified Company Representative, [24]

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No. It is all according to schedule. I was submitted pictures a couple of days ago on groundworks have been finalized. And in prior to this, we see the development of finishing works. And next week, we'll have a meeting of the steering committee just to talk these things through to see what the -- how the investment goes. And I do believe the investment is going to go as planned. And there is a number of works that happen in parallel, one to another. I refer to those which are visible. I refer to this resurfacing of the investment, and this is something that you can see with your naked eye. Good ladies and gentlemen, any further questions?

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Unidentified Analyst, [25]

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[Christian Numara from BDM]. My question refers to sales. You talked at large about generation and distribution. Now in terms of sales, what's the situation with the pricing act? In your reports, you keep reiterating that this very act is neutral vis-à-vis your results, but if we return to your Slide #14 and if we run analyses of your reports quarterly- and half year-wise speaking, it turns out that, beginning with 2018, it's equivalent to [minus 90, minus 180]. It's enough to add these numbers, minus the corrections of revenues, and this is equivalent to what I have just said. So perhaps you would like to say a few words of the explanation.

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Unidentified Company Representative, [26]

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Now concerning the sentiment of the pricing act. On bridge, what we observe is the [loss] margin. [So attributable to the] entire operation consisting in the adaptation of our operations to the pricing act. It is not seen in this slide if we aren't -- the loss on the revenue, plus the compensation which we showed. Herein we've got an additional income, plus 110 million in reserve which we generated last year, and this builds on the positive result of this current year. So this very impact of pricing act is, as President rightly observed, neutral in this year.

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Unidentified Analyst, [27]

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I don't disagree. These figures which you keep showing are very much divorced from what you're talking about, [250 million and 93 million] of compensation Q3.

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Unidentified Company Representative, [28]

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And now let us take a look at consecutive corrections. 503 million, something that you communicated about. After Q2, we've got also a correction of 67 million compensations for Q3, plus the impact of the [G] correction equivalent to 110 million, which results in minus 90 million, overly speaking. Please observe some revenues were down from the beginning of this year as [G9]. We did not correct it altogether. And one has to take this into consideration. Well, so as I said, this impact is to be considered neutral. Let's leave this slide, shall we? Any other questions?

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Unidentified Analyst, [29]

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I'd like to bring about -- bring up CapEx for a minute. Can we see the relevant slide, please, where you were showing data concerning your facility in Grudziadz?

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Unidentified Company Representative, [30]

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This is to -- let us return to Slide #5.

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Unidentified Analyst, [31]

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And you're intending to have this included in the auction on December 6, if my understanding is correct. What's the capacity of this unit? And when would you say the tendering to be finalized?

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Unidentified Company Representative, [32]

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Yes indeed. This is our intent. That's notwithstanding it is not sure, as of now, if this happens this year or this will happen next year. Now we have just concluded competitive dialect procedure. Now we are at the stage of the preparation of terms and conditions of this order. You'll be notified about it via a separate notification.

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Unidentified Analyst, [33]

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So this is counter to what you communicated previously.

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Unidentified Company Representative, [34]

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And indeed it is taking part, but now we are contemplating of our approach and to the power auction what is eventually more economically viable for us.

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Unidentified Analyst, [35]

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What might be the overall cost of this unit?

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Unidentified Company Representative, [36]

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PGE got one offer. The cost exceeded and the budget by 20%.

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Unidentified Analyst, [37]

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That's my question. How do you see the budget for this enterprise?

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Unidentified Company Representative, [38]

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As I have already replied, now we are at the stage of the preparation of terms and conditions for the procurement, and we will see what kind of offers we'll eventually receive. I beg your pardon. This is no time, nor is this a right circumstance, to talk this through. We are here and now, and we are due to decide what's going to happen eventually. Any further questions?

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Unidentified Analyst, [39]

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[Miha Kauzak]. I'd like to ask about the impact of electricity import. How is this shaped and influenced by the development of inter-systemic connections? There are certain targets, 10% for 2020, including the Baltics. Then there's a strategy for 2030, and there's also a strategy of PSE [on unblocking] these permeability indicators. Can you tell us more insights into this issue? What kind of data have you applied? There is this EU directive whereby we read about targets separately for 2020, 2030. And much is being done within the area of imports, power imports. And I'm just contemplate what these dynamics might be.

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Unidentified Company Representative, [40]

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That should be a question to PSE. This is not a right question for us. Now Ostroleka is ready to operate. And it is all down to a system operator, which button and -- they're willing to switch or not.

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Mariusz Wojciech Gajda;Energa Wytwarzanie SA;Vice President of the Management Board, [41]

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Mariusz Gajda, member of the Board of (inaudible). Thank you. As regards the impact of these conditions of our work, there's none. Whatever we generate, we can sell. What you're referring to is that the -- is the general European legislative landscape, more to deal with PSE rather than with our generation capacities. It is not we have sensed -- something that we have sensed as of now.

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Unidentified Analyst, [42]

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Are these prices going to be verified, adjusted?

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Unidentified Company Representative, [43]

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These are all PSE investments that we are talking about. This is not the investments that we would run. We are no cross-country grid operators. And what you're referring to is -- has to do with system operators, not [ESD] grid operators. Piotr Meler has something to add on this topic.

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Piotr Meler;Energa OZE;CEO, [44]

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Surely so, this will have something to do with the stabilization and changes in electricity prices, and our pricing packs do take them out of it. We consider this when developing our financial models. And as President Gajda rightly said, as of now, there is no impact whatsoever. Nevertheless, in a certain perspective, we wouldn't like to talk about it publicly in any way, but for sure, we do take a note of it when developing our models.

Thank you very much. Pawel.

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Pawel Puchalski, Santander Brokerage Poland, Research Division - Head of Equity Research Team [45]

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Let's talk about facts. The facts are that net debt-to-EBITDA at the level of 2.9, growth in CapEx and distribution probably next year and a bigger budget for Ostroleka C. You're talking about a potential start of construction of 2 very big investments projects gas of -- gas-fired units. And do you take into account the payout of a dividend next year possibly?

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Unidentified Company Representative, [46]

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Ladies and gentlemen, Energa is a dividend company. And that was our slogan when we went to the stock exchange, but as you know, currently there are big macro-scale investments. And I would say that, as of today, we are at a too early stage. And we can talk about that at the stage of the auditors looking into the balance sheet. And that's when we are going to talk about that issue. So let's leave it an open question for now, especially since we have been hearing about our energy companies and the treasury companies were going to invest in order to protect against the cooling down of the economy. So an investment might be necessary. It's too early to talk about that. It's too early to decide. Thank you.

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Pawel Puchalski, Santander Brokerage Poland, Research Division - Head of Equity Research Team [47]

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If you allow, I do not agree. You said we have to wait for auditors to verify. It sounds like a suggestion and possibly additional provisions, but you know your performance. You know what you have in your books for the next year in terms of construction and investment, so auditors have nothing to say in those terms, unless we're talking about provisions that you might build.

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Unidentified Company Representative, [48]

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Pawel, in terms of provisions, we're not a unit of the public sector. We are a company of the treasury, and we start provisions. We create provisions and units of the local administration. And all the reserves, the provisions that we have, have to be consulted with the auditor who looks through the financial report every single year and verifies that's -- the report at the end of every single year. It's too early to talk about this.

As I told you, we do not foresee at the end of 2019 any terrible or particular provision necessary that might put the whole financial report or the financial results upside down. And here we have all the 2016 issue that we are -- the [MSF] 2016 that we have to cope with. Then we're going to discuss that with the auditors, clearly. And that will be stated in the financial report. If provisions have to be created, that will be discussed in additional notes to the financial report.

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Pawel Puchalski, Santander Brokerage Poland, Research Division - Head of Equity Research Team [49]

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May I ask an additional question, please? I'd like to ask according to you how the situation might develop in terms of sales prices next year. Are we to expect a new act, new compensation? How might the situation develop in terms of retail and business clients both in terms of the G tariff, for example?

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Unidentified Company Representative, [50]

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Well, we are in a dialogue with the president of the energy market regulation office. And this question is slightly political, if I may say so.

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Pawel Puchalski, Santander Brokerage Poland, Research Division - Head of Equity Research Team [51]

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No, that's not what I meant. I am only interested in financial results, so I wanted to ask you whether you have a negative margin on the G tariff or a positive one. And what would the brackets be for the price and G tariff that the wholesale increase was -- how it's translated. I'm not talking about political issues. I'm talking about specific financial implications for Energa. If we have a negative margin this year and next year, you have to move into -- you go to the market. You buy the black energy and the housing market for 260. So how do you translate that into prices? This is what I mean. I am not talking about what the government decides, et cetera. That's not what I mean at all.

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Unidentified Company Representative, [52]

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Well, as I told you, we are preparing a plan for 2020. And please believe me. It's a big intellectual exercise at this point, and we need to agree on many levels. So I think that this topic can be touched after the publication of the financial report. Thank you.

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Unidentified Company Representative, [53]

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Ladies and gentlemen, I understand that part of the questions from the Internet users covered what's been discussed in the hall. Let's see what we have here.

There are questions concerning Q4 asked by Internet participants. As I told you, we do not publish forecasts, and we are not going to do that. We're waiting for the closure of the financial report for 2019. And please join us at the next conference. You are welcome to partake. And please use the refreshments.

Thank you.

[Statements in English on this transcript were spoken by an interpreter present on the live call.]