U.S. Markets open in 1 hr 44 mins

Edited Transcript of PGE.WA earnings conference call or presentation 13-Nov-19 9:00am GMT

Q3 2019 PGE Polska Grupa Energetyczna SA Earnings Presentation

Dec 9, 2019 (Thomson StreetEvents) -- Edited Transcript of PGE Polska Grupa Energetyczna SA earnings conference call or presentation Wednesday, November 13, 2019 at 9:00:00am GMT

TEXT version of Transcript

================================================================================

Corporate Participants

================================================================================

* Emil Wojtowicz

PGE Polska Grupa Energetyczna S.A. - Vice-President for Finance

* Henryk Baranowski

PGE Polska Grupa Energetyczna S.A. - President of the Management Board

* Jakub Frejlich

PGE Polska Grupa Energetyczna S.A. - Head of IR

================================================================================

Conference Call Participants

================================================================================

* Michal Kuzawinski

JP Morgan Chase & Co, Research Division - Research Analyst

* Pawel Puchalski

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

* Robert Maj

IPOPEMA Securities S.A., Research Division - Analyst

================================================================================

Presentation

--------------------------------------------------------------------------------

Jakub Frejlich, PGE Polska Grupa Energetyczna S.A. - Head of IR [1]

--------------------------------------------------------------------------------

Good morning and welcome, ladies and gentlemen, to the publication -- or presentation, rather, of the PGE financial results for the 9 months -- for Q3 and the 9 months of 2019 of PGE. Welcome to the analysts, all those in our office as well as those watching us in live stream online.

The host of today's meeting are traditionally, Mr. Henryk Baranowski, President of the Board and CEO; Mr. Emil Wojtowicz, Vice President of the Board and CFO. My name is Jakub Frejlich. And by our standard, we'll first discuss the presentation and the events of Q3, then we will give the floor over to you, to our colleagues from the sell side and buy side in the room, and then to those who are watching us online.

Without further ado, over to you, Mr. President.

--------------------------------------------------------------------------------

Henryk Baranowski, PGE Polska Grupa Energetyczna S.A. - President of the Management Board [2]

--------------------------------------------------------------------------------

Thank you very much. Good morning, ladies and gentlemen, with a slight delay, but hopefully, without no further problems. We are starting the presentation of the results, as usual, to start with a brief overview of the past quarter, after which we'll discuss our progress towards meeting the challenges of the ever-changing -- dynamically changing energy market in Poland.

I'm glad that in financial terms, we can support a good quarterly EBITDA at the level PLN 1.7 billion, which is 16% higher than in Q3 2018. At the same time, one-off events contributed to a result only to a slight degree. And additionally, that result translated significantly to the operating cash flows. They amounted to PLN 1.6 billion. And let me remind you that in the previous years, we had negative cash flows. Throughout the year, PGE Group has achieved a net profit of PLN 2.2 billion, which represents 30% more than at the same stage of 2018. These results are so much more valuable if you look at operating results, which reflect the effect of the market pressure as a result of negative external factors which will be further discussed by Mr. Wojtowicz. The PGE output was lower by 14% for the quarter and 12% lower in the 9 months of the current year. Also, in the distribution of power, we did not experience a rising trend and our volume was 1% lower than in the previous year. However, we're trying to maintain the leading position in retail sales by selling around 11 terawatt hours in Q3, which was more than the previous year, owing to the increased demand for heat. We also increased the sales of heat by the way of doing so, mitigating the negative dynamics of the operating results which we had for the semester.

So let's review now the progress in our investments. We have officially finished and commissioned the construction of units 5 and 6 in Opole power plant, the largest infrastructure investment in Poland post 1989. Those new units are an important moment of Poland's reformation, combining stable systemic solutions with the renewable energies. New technologies applied to the construction mean that this is one of the most state-of-the-art conventional power plants in the world. New power units meet EU's environmental standards for each terawatt hour produced in the Opole units. 40% to 60% less NOx and SOx will be produced and the unit output of CO2 is 25% lower as compared to the legacy energy units at PGE. Our investments are a very important element of the economic growth. It was no different in the case of the Opole investment. As much as 70% of all the orders were placed with Polish companies. The construction site are also thousands of jobs at the peak of the construction; 5,500 individuals worked on the construction site. New units were designed for 35 years with the installed power of 8,000 hours per annum. They have also been adjusted to the generation of heat and co-generation at the level of 30 thermal megawatt hours.

We can also easily focus on the operating utilization of the new units and finalizing our next investment, which is unit 7 in Turów. September was the 58th month of the construction of that unit in Turów. This project is also moving towards the end, in line with the information obtained from the general contractor. The advancement was 30 -- of 93%, with building and assembly works continued. While presenting the previous units, we informed that we had successfully applied the voltage of 112 KV, which opens the gate for turning in. We're moving towards the next milestone, which is the ignition of the oil boiler, which is planned for Q1 2020. Energy is a long-term investment industry. That's why we want to inform you systematically about the progress of projects, which will be finalized in a couple of years and which will determine the future of PGE Group.

One of the investment projects prepared by us is gas steam units of 700 MWe, each with a high-efficiency gas turbine HJ. The innovative Dolna Odra will be one of the most modern and environmentally friendly systemic power plants in Europe ready to meet the requirements of the energy market. The key factor of economic feasibility is to obtain long-term support from the power market. And the project will be seeking support at the power auction on December 6, 2019, where it will be possible to obtain the remuneration as of 2024. Those units will be applying for a 17-year power contract. At this moment, we are at the stage of choosing the general contractor, analyzing an offer which has been submitted as part of the tendering procedure. Behind the -- well, the project is supported by a couple of arguments, which are important not only from the PGE Capital Group's point of view, but from the point of view of the entire energy system in Poland.

The gas units in Dolna Odra are response to the needs for flexible power, especially in the north of the country, in conjunction with the intense development of eolic sources. The pursuit of project also provides an opportunity of replacing the coal-fired units with gas. And it's also important from the point of view of the diversification and lowering the CO2 emissions. And additionally, this also supports the business case for this project.

The CO2 price exposure will also be favored by the Klaster project. This is a cluster of 3 wind farms which is pretty much advanced, which should be no surprise since we are planning to obtain building permits by the first quarter of 2012. At one of the farms, Karnice II, the assembly of 10 turbines was finalized in September. In December, we are supposed to run the test of those turbines. In the other farms, Rybice and Starza, we are continuing the supplies and assembly of those turbines. The high-voltage line, Kamien Pomorski, Rybice, Skrobotowo, will be ready to use by the end of the year. The commissioning of wind farms as part of the Klaster project means the increase of installed power of wind farms by 18%. The estimated annual output at the level of roughly 277 gigawatt hours corresponds to the annual demand of roughly 130 households annually. Additionally, this investment will allow us to avoid CO2 emissions at 215,000 tonnes per annum, which is a significant scale. But this is but a drop in the sea.

And since we're talking about the sea, the offshore wind farms are supposed to be the foundation of our strategic goal, which is the achievement of 25% of share in renewable energies by [2030]. The most important piece of information in this area is the decision to start negotiations with Ørsted on the sales of 50% of shares in Baltica 2 and Baltica 3 with a total power of 2.5 gigawatts and determining the cooperation conditions. Right now, we're negotiating the transaction documentation. The Danish company of Ørsted is one of the European leaders in energy transformation. We hope to be able to form a successful business duet, but -- or duo, but we have to finalize -- we have to wait for the end of our negotiations. On technical terms, we continued the wind measurements and planning, and we've also launched a tender on the preliminary tests of the seabed.

Since the latest results in -- presented in September, a lot has happened in terms of electro mobility. We've been involved in several initiatives supporting the popularization of power-based transport, electricity transport. We're doing this in a complementary way. As you can see on the slide, we are favoring the comprehensive system from infrastructure through zero emission public transport through to successive complementation of our own fleet by electric cars. We're not on our own. We are trying to achieve synergy effects that we wish to achieve, along with our partners. We want for electro mobility to become available for everyone not only in the most important cities in Poland through our FIZAN Eko-Inwestycje investment fund along with the agency for development of industry. We've initialized a project to replace the fleet of -- used by local authorities, among others, to transport students to schools. We wish to coordinate the production of electric buses, among others, by Autosan. I'm convinced that electric public transport is a prospective business area and it's also another tool for combating for clean air in Poland's towns and cities.

Another important element is the electrification of the fleet used by power and emergency services. We can see a lot of potential for these to be used also by PGE Group, which is favored by our available funds. That should provide an additional impulse for triggering interest in such solutions in the market. In developing electro mobility, we have to remember about the charging infrastructure. This moment, we have over 50 charging areas throughout the country. And the agreement concluded in September with the Social Security Fund for charging station will significantly curtail the time necessary for the next investments.

And now over to Mr. Wojtowicz.

--------------------------------------------------------------------------------

Emil Wojtowicz, PGE Polska Grupa Energetyczna S.A. - Vice-President for Finance [3]

--------------------------------------------------------------------------------

Good morning, ladies and gentlemen. Let me start with wrapping up the energy market, what happened in Q3. Just as in Q2, we observed a decrease in the consumption. We're talking about minus 1.8% or 0.7 terawatt hours and an even more significant fall of generation countrywide. How do we explain the decrease in the consumption? Summer was not that hot. So the consumption for the purposes of air conditioning was lower. We all know that in our country, we have more and more consumer or citizen photovoltaics. And we probably also notice that some of our industrial customers are also decreasing their demand. Well, maybe not so much of the generation or production, but they are also implementing some solutions that reduce energy consumption.

There is one more interesting thing that you mostly failed to notice right off. The national consumption is the gross consumption, i.e., that is also the volume involving energy generation. So once imports increase, import has a known consumption of 0. If import reduces the output, the generation at Belchatów power plant and the consumption is the same by the customers. The statistics show that imports by reducing generation in the Turów power plant, for instance, reduces the consumption at very -- the power plant of Turów, and likewise in the coal mine, which delivers or supplies coal to the power plant. And then in the national statistics, that consumption is lower. Of course, this is not a factor that completely explains the changes observed. But you also have to take it into account.

We can see that for some time now, probably since Q2, those 2 curves have diverged, as you can observe them at the top of the red one showing consumption and the blue one showing generation, and indeed in imports are growing. Imports stem -- the increased import stems from 2 facts: increasing the power availability at the borders and the fact that price differences are maintained between Poland and such countries as Germany or Sweden, and very cheaper electricity is bought to Poland. As we take a look at the way that the prices have looked, the average price of a forward contract for the next year amounted to PLN 269. Well, this is more than the average for the prior year, assuming the supplies in 2019. But we also have to take into account that CO2 prices have also grown significantly in the margins. That [stay] after subtracting CO2 cost for 2020 are planned to be lower than the ones observed this year. And I will also reiterate it while presenting the outlook.

Since the generation -- although in the entire Poland's -- in Poland's entire power system, PGE, it was lower. PGE had to perceive it, and we can see that the generation in Q3 was 14% lower; we're off 23%. It was the drop in lignite-based production. In terms of hard coal, the volumes are roughly stable. And Q3 is the first quarter that -- where we can fully see the generation from unit 5 and partially of unit 6. So we can also observe that units 5 and 6 have been replacing legacy hard coal-fired units, which also means a lower consumption of hard coal as the fuel and lower CO2 emissions.

Similar amounts are observed for the volumes for the 9 months. A decrease in lignite was of 16%, 12% in terms of hard coal. In hard coal unit, 5 is accounted for in these numbers fully for Q2 and 3, and the unit 3 -- the unit 6 partially for Q3. So if you were to also account for the generation, which is not included in the statistics during the test based on hard coal, then it would still be even more.

The key financials for Q3. Both recurring EBITDA as well as reported EBITDA are higher in Q3. There were no major differences between those 2 values. Actually, the main one being very change in the market value of CO2 emissions obtained additionally that we treat throughout the year as a one-off. When it comes to indebtedness, that can arouse some doubts or questions that since the EBITDA is so high and there are no major capital expenditures and the debt is growing, this is connected with supplementing the deposits in conjunction with a trade in the energy extent where -- and let me remind you that we're 100% obligated as the market changes, as the volatility in the market increases, our deposits are also increased. And since in accounting terms or in reporting terms, this is restricted cash that we're talking about. It does not reduce net debt, which by virtue of the same, increases.

The main changes in terms of EBITDA between Q3 2018 and Q3 2019. I'm sure the energy price has risen, which has increased the EBITDA by almost PLN 1 billion. Even considering the increase in the CO2 costs, this effect is positive, i.e., we're talking about PLN 600 million net. And since the volumes have decreased, also for a lignite, it is significantly reflected in terms of EBITDA. It's roughly PLN 450 million we're talking about. The retail market margin, that's a decrease by over PLN 100 million. That's a decrease connected with the electricity law and the changes in the provisions opened through the year. All the other factors are actually less significant and they mitigate each other.

A couple of words about our operating factors for our generation assets. We can see a smaller availability in terms of our lignite-based assets, which is connected with the overhauls in Belchatów and the modernization in Turów. But the thing that we can mostly observe is lower power utilization factor. The power was available, but it was utilized even less. There were similar factors on hard coal, actually almost the same availability factor and a much lower capacity factor.

In terms of wind assets, the availability was stable owing to the higher windiness. We obtained a better capacity factor and a higher generation.

A couple of words on distribution. In Q3, we can see a stable or slightly decreasing volumes of the energy distributed. For the 9 months, it's a stable amount. When it comes to network losses, they are still being decreased. Right now, we're talking about a level of roughly 5%. When it comes to SAIDI, both in Q3 as well as in Q2, they were at quite safe levels in Q1. Q1 was the quarter that had disadvantageous impact as compared to the previous year. It's still a lower amount. SAIFI, which is the number of outages, here this amount is slightly higher than in the previous year. Connection time is getting reduced in a stable manner.

When it comes to capital expenditure, it's PLN 4.5 billion. The higher amounts -- the higher expenditures are in conventional energy. That's the Opole power plant, where we are almost finishing the expenditures; the Turów power plant, where the project is advanced and the expenditure is still incurred. Another important element is distribution. Over PLN 1 billion in total, both in terms of new connections as well as the ongoing modernization of our network -- of our grid. When it comes to renewable energies, the Klaster project is underway already, but no significant expenditure is being incurred as yet. We will probably be incurring it in Q4 and Q1 next year.

To take a look at the next year, let me just discuss it on a segment-by-segment basis. But let me just make one remark. We are relating here to the reported EBITDA, which is particularly important for conventional generation, where this year, we have about PLN 1 billion worth of one-off events, and plus, in terms of the CO2 allowances. The results in conventional generation are most sensitive to what will be going on in the power generation system next year or energy system, and next year, how large the imports will be and which power plants will be reduced by the operator and which ones will be more laden.

Looking at the market, we can expect lower margins than in the current year. For instance, owing to the expectations of a higher import level, which this year -- I mean the first part of the year of 2019 was characterized by lower import than Q3. We rather expect that those higher import levels will be maintained as observed in Q3. Throughout 2020, our units will be available for generation. They will be fully available. I mean both new units in Opole and in Turów and in Belchatów. We will have smaller overhaul burden. So our results will significantly depend on the situation in the system and on the borders. How large transborder powers will be available in 2020, will also be the first year with no free CO2 allowances for power generation. For 2018, it was 8.5 million tonnes. So we're talking about almost 1 million -- PLN 1 billion worth of those allowances.

In terms of district heating, the difference between the reported EBITDA and recurring EBITDA is also observed. It was also -- there were also additional CO2 emission allowances, about PLN 300 million worth. Also in this segment, there will be no free CO2 allowances for 2020. Here, we expect that the reported EBITDA will decrease. In terms of recurring EBITDA, we believe it might be close to what we've had in 2019. We expect that the new tariffs will involve higher coal prices and higher CO2 emission prices. Of course, the higher CO2 emission prices are only partially transferred by the benchmark tariff. When it comes to renewables, probably that arrow putting downwards is probably the closest to the border line of it being also to the side. That's because of the base. Since this year was characterized by higher windiness and a higher output than average, we don't assume that we will always be above the average. We hope to at least reach the average. So on the legacy or old -- or current assets, the production will be slightly lower, but an additional farm will be added, as mentioned by the CEO. That will probably be commissioned in Q2 and will be contributing to our results through part of the year.

Higher operating costs, as presented on this slide, is related to the expenditure on the offshore project. So far, it's been part of the EBITDA. As the amounts are increased, we will consider whether we won't be capitalizing those expenditures. It will impact the EBITDA, but not so much the amounts actually spent. In terms of supply, it's the most difficult segment to be compared within the last couple of years and owing to various provision balances. Some provisions were set up in 2018 and released this year. Definitely, what we can observe is that the margins that were not affected by the electricity law, well, the margins this year are quite low. So we don't expect that they should yield better results. And this year, we had the higher EBITDA effect owing to provision reversal.

In terms of distribution, our second largest segment in terms of the EBITDA is where we expect stability characteristic of this segment. Over the regulatory asset base is higher by roughly PLN 700 million. However, owing to the construction of the interest rates, especially the profitability of treasury bonds as the risk-free rate, the weighted average cost of capital will drop significantly. So we believe that these 2 will mitigate each other, the higher RAB and lower WACC.

CapEx will drop in conventional generation. We finished our largest investment. The final stage is underway in Turów. So for the entire segment, CapEx will drop. Of course, we are continuing the projects that are connected with BATs. In district heating, we will be modernizing on a continued basis. The BATs in terms of renewables, the CapEx will be higher owing to finishing of the Klaster farm project, and they will be even higher when we decide to capitalize offshore expenditure.

Supply is not a significant segment in terms of capital expenditure. In terms of distribution, CapEx will be growing. A grid grounding program has been started and will be continued. We keep working on ensuring the reliability of the grid so the expenditure will be grown. Thank you very much.

================================================================================

Questions and Answers

--------------------------------------------------------------------------------

Jakub Frejlich, PGE Polska Grupa Energetyczna S.A. - Head of IR [1]

--------------------------------------------------------------------------------

Thank you very much for the presentation. Before I manage to say anything, Pawel has raised his hand. So over to you, Pawel.

--------------------------------------------------------------------------------

Pawel Puchalski, Santander Brokerage Poland, Research Division - Head of Equity Research Team [2]

--------------------------------------------------------------------------------

Pawel Puchalski, Santander. So perhaps, let's start with the most important question. Will the Board be proposing that a dividend will be paid out for 2019? And if so, at what amount?

--------------------------------------------------------------------------------

Emil Wojtowicz, PGE Polska Grupa Energetyczna S.A. - Vice-President for Finance [3]

--------------------------------------------------------------------------------

Is that it? Just one question?

--------------------------------------------------------------------------------

Pawel Puchalski, Santander Brokerage Poland, Research Division - Head of Equity Research Team [4]

--------------------------------------------------------------------------------

Yes, just one question.

--------------------------------------------------------------------------------

Emil Wojtowicz, PGE Polska Grupa Energetyczna S.A. - Vice-President for Finance [5]

--------------------------------------------------------------------------------

Well, I would go for a series of questions, but let's start with it. Okay, let me take it. As of today, we have not discussed in detail on the management board. In terms of the specific amount of the dividend for the current year, the policy -- the dividend policy still applies.

--------------------------------------------------------------------------------

Pawel Puchalski, Santander Brokerage Poland, Research Division - Head of Equity Research Team [6]

--------------------------------------------------------------------------------

So as I understand, there is no agreement on the amount of the dividend but the fact of paying out the dividend, oh, you intend to pay out dividend next year.

--------------------------------------------------------------------------------

Henryk Baranowski, PGE Polska Grupa Energetyczna S.A. - President of the Management Board [7]

--------------------------------------------------------------------------------

We have not changed our dividend policy.

--------------------------------------------------------------------------------

Pawel Puchalski, Santander Brokerage Poland, Research Division - Head of Equity Research Team [8]

--------------------------------------------------------------------------------

Okay. May I ask 2 additional questions?

--------------------------------------------------------------------------------

Emil Wojtowicz, PGE Polska Grupa Energetyczna S.A. - Vice-President for Finance [9]

--------------------------------------------------------------------------------

You're in charge, Kuba.

--------------------------------------------------------------------------------

Jakub Frejlich, PGE Polska Grupa Energetyczna S.A. - Head of IR [10]

--------------------------------------------------------------------------------

Yes, please. Be my guest.

--------------------------------------------------------------------------------

Pawel Puchalski, Santander Brokerage Poland, Research Division - Head of Equity Research Team [11]

--------------------------------------------------------------------------------

So perhaps the last slide, the CapEx slide, because CapEx is indeed decreasing, but I remember your declaration on investments, at least PLN 1.5 billion in FIZAN, a closed fund. So my question is, is this only a segmental approach? Or can the cash outflow increase in 2020 because you would need to add to the generally decreased CapEx? You would need to add the purchase of investment certificates. Am I right in understanding this?

--------------------------------------------------------------------------------

Emil Wojtowicz, PGE Polska Grupa Energetyczna S.A. - Vice-President for Finance [12]

--------------------------------------------------------------------------------

In what I said, I was relating to the CapEx of the individual business lines. And if FIZAN should invest also in the projects pursued by us, then it is included in the prospects and the outlook.

--------------------------------------------------------------------------------

Pawel Puchalski, Santander Brokerage Poland, Research Division - Head of Equity Research Team [13]

--------------------------------------------------------------------------------

Supposing it doesn't invest because there is no electro mobility, so if FIZAN were to invest in electro mobility, is it included in one of those segments? Or is it an out of segment? Because I would be interested what would happen if FIZAN wanted to invest PLN 1.5 billion in electro mobility. I can see the sectors I am familiar with, but I think electro mobility would be a new segment. Wouldn't it?

--------------------------------------------------------------------------------

Emil Wojtowicz, PGE Polska Grupa Energetyczna S.A. - Vice-President for Finance [14]

--------------------------------------------------------------------------------

Yes. It would be out of this simplistic table.

--------------------------------------------------------------------------------

Pawel Puchalski, Santander Brokerage Poland, Research Division - Head of Equity Research Team [15]

--------------------------------------------------------------------------------

Okay, a third question. When it comes to distribution this year on a quarter-by-quarter basis, you've been saying that the labor costs are an issue to you, and they have grown in the segment by 13% on a year-on-year basis. And we're all thinking about the pressure on salaries to be exerted in 2020. And as I look at your outlook for 2020 in terms of the EBITDA, that's the regulatory asset base, we have the weighted average cost of capital, but there is no mention of the labor costs. Why are you not afraid of labor costs for distribution in 2020?

--------------------------------------------------------------------------------

Emil Wojtowicz, PGE Polska Grupa Energetyczna S.A. - Vice-President for Finance [16]

--------------------------------------------------------------------------------

Well, first of all, I beg to differ on the amount of 13% in decrease -- in terms of the increase. Depending on who counts what because personnel costs is one amount and it's made up of at least 3 parts of what is dispersed from a change in different provisions and probably some other items such as training and the least significant ones. The way I look at what is being disbursed, I can see an increase by roughly 7% rather than 8 -- 13%. I'm naturally relating to Slide 36, where the personnel costs rise on a year-on-year basis by 13%. And for the 3 quarters, you have more detailed data. I will never have them. That's why I'm explaining that.

Now are we not afraid of the personnel-related costs? It's not a matter of fear, but let's forget the semantics. Yes, we are taking this into account. We're also expecting that the salary cost increases or the asset management cost increases will be reflected in the tariff.

--------------------------------------------------------------------------------

Jakub Frejlich, PGE Polska Grupa Energetyczna S.A. - Head of IR [17]

--------------------------------------------------------------------------------

So just to relate to this, what you are talking about, Slide 36, that's the P&L. On Slide 34 and 45, we adjusted by one-off events, also by actuarial items. So these increases are by 9% rather than 13%.

--------------------------------------------------------------------------------

Pawel Puchalski, Santander Brokerage Poland, Research Division - Head of Equity Research Team [18]

--------------------------------------------------------------------------------

Of course, I'm taking each figure you provide. Well, this way -- or rather, 13% is very much; 9% or 8% is still quite much.

--------------------------------------------------------------------------------

Jakub Frejlich, PGE Polska Grupa Energetyczna S.A. - Head of IR [19]

--------------------------------------------------------------------------------

But I just wanted to show you that, that the nonbusiness-related issues have been adjusted and presented on a different slide, where we show the recurrent items.

--------------------------------------------------------------------------------

Unidentified Analyst, [20]

--------------------------------------------------------------------------------

Thank you very much. [Christian for BDM]. Let me start with the current business. What surprises us in the Q3 results, supply, PLN 29 million in recurrent EBITDA, which corresponds to the EBITDA. And so traditionally, it probably also corresponded to those. Well, can you explain what happened there? And what is the actual potential?

--------------------------------------------------------------------------------

Emil Wojtowicz, PGE Polska Grupa Energetyczna S.A. - Vice-President for Finance [21]

--------------------------------------------------------------------------------

We're talking about Q3, yes, PLN 29 million of recurrent EBITDA versus PLN 150 million a year ago.

One more remark. The Supply segment both encompasses operated company and trading, which is the wholesale trade as well as PGE Paliwa, PGE fuels, which trades in fuels. As we compare it to the EBITDA for Q3 of the previous year, then we're probably talking about both an impact of lower margins in Supply segment and an impact of the electricity law as well as what we can see as the valuation of instruments. That's what I wanted to ask you about. This is part of the PGE result -- result of PGE Paliwa, which, on the one hand, buys coal, and on the other hand, it sells it. So under [corporate] model. It measures it based on the market value, I mean the contracts, the supplies and any financial instruments which are used as hedge instruments.

--------------------------------------------------------------------------------

Unidentified Analyst, [22]

--------------------------------------------------------------------------------

I presume we can be talking about some items that we cannot exactly see here. But just to illustrate it, what's the amount connected with the update of such financial instruments, be it for CO2s or fuels? How did it impact the Supply segment in Q3? Because in the previous quarters, we had large negative consolidation results which resulted in positive amounts on -- in Supply. And we thought it was -- it roughly stemmed from the electricity law. And now we have a reverse situation. So we have probably a significant minus in supplies and some plus on the adjustments. So that's roughly what the question boiled down to.

--------------------------------------------------------------------------------

Emil Wojtowicz, PGE Polska Grupa Energetyczna S.A. - Vice-President for Finance [23]

--------------------------------------------------------------------------------

There is no significantly high minus in Q3 in Supply when it comes to PGE Obrót, PGE supply company.

--------------------------------------------------------------------------------

Unidentified Analyst, [24]

--------------------------------------------------------------------------------

So the market situation has meant that this segment which generated PLN 150 million in EBITDA is now generating roughly PLN 30 million. Is that right?

--------------------------------------------------------------------------------

Emil Wojtowicz, PGE Polska Grupa Energetyczna S.A. - Vice-President for Finance [25]

--------------------------------------------------------------------------------

I think we'll get back to this. And IR services will provide you with an explanation.

--------------------------------------------------------------------------------

Unidentified Analyst, [26]

--------------------------------------------------------------------------------

And a quick question about the outlook. In conventional generation, because the outlook is provided on a year-on-year basis, depending on -- we are not aware of this, and it depends on the base that we start with. But are you taking into account any significant write-downs or recultivation provision to be opened in Q4? Or have you assumed that in presenting your outlook?

--------------------------------------------------------------------------------

Emil Wojtowicz, PGE Polska Grupa Energetyczna S.A. - Vice-President for Finance [27]

--------------------------------------------------------------------------------

When it comes to the -- any changes to the provision balances, we're not assuming this in our outlooks. It's not included in our outlooks.

--------------------------------------------------------------------------------

Unidentified Analyst, [28]

--------------------------------------------------------------------------------

Okay, thank you. One more question about the CapEx, Slide 20. Can you say how many invoices are still left from Opole to be spent in Q4? And a similar question is on the Klaster project as presented by the CEO, that Q1 will be the most burdened one. So any tightens there?

--------------------------------------------------------------------------------

Emil Wojtowicz, PGE Polska Grupa Energetyczna S.A. - Vice-President for Finance [29]

--------------------------------------------------------------------------------

Okay. When it comes to Opole, we still have roughly PLN 600 million or PLN 700 million on top of this. And when it comes to Klaster, actually, the entire amount is still -- is yet to be spent.

--------------------------------------------------------------------------------

Jakub Frejlich, PGE Polska Grupa Energetyczna S.A. - Head of IR [30]

--------------------------------------------------------------------------------

I had it some place. The amount of the entire project is PLN 545 million, and the vast majority has not been paid for as yet. This is connected with the commissioning schedule and the settlements. This is always delayed by several months as the works are performing. It's also a matter of presentation. Because on the one hand, we have presented as CapEx because we're talking about the disbursements as the money is spent. So this is not presented hand-in-hand because what you can see is our CapEx for the period has to be taken into account as the entire investment rather than for the quarter as we compare it for the investment cash flows, okay?

--------------------------------------------------------------------------------

Unidentified Analyst, [31]

--------------------------------------------------------------------------------

(inaudible), [TFI]. I have another, in fact, on the generation segment. Supposing you excluded PLN 1 billion in free CO2 emissions, would you expect a decrease on the EBITDA in generation?

--------------------------------------------------------------------------------

Emil Wojtowicz, PGE Polska Grupa Energetyczna S.A. - Vice-President for Finance [32]

--------------------------------------------------------------------------------

Well, it's a difficult year for me to forecast. If the volumes are the same as this year, they will not increase, that's to say we're going to be -- to observe a high import and the consumption does not grow, hopefully doesn't decrease further than the margins observed this year. And by margins, I understand price less CO2 cost, then it would indicate a decrease in the results. However, if the volumes should come back to the levels that we observed in the previous year, then I presume that the increase in the volumes could compensate for the decrease in the margins.

--------------------------------------------------------------------------------

Henryk Baranowski, PGE Polska Grupa Energetyczna S.A. - President of the Management Board [33]

--------------------------------------------------------------------------------

Mind you, please pay attention to one fact that occurred that the generation in -- on lignite was limited by PSE. We cannot foresee whether such limitations will occur next year. Part of them were connected with the grid overhaul. We're treating it as a one-off event, but the increasing energy imports will have a negative impact for the segment.

--------------------------------------------------------------------------------

Robert Maj, IPOPEMA Securities S.A., Research Division - Analyst [34]

--------------------------------------------------------------------------------

Robert Maj, IPOPEMA. About the conventional segments, Slide 12 and 21, we have 2 prices. On 12, you're showing the price of PLN 269. And on 21, you're saying that it's PLN 280, so that's the price to be struck in 2020. So that's the higher price -- the average wholesale realized price at PLN 275 -- PLN 280.

--------------------------------------------------------------------------------

Jakub Frejlich, PGE Polska Grupa Energetyczna S.A. - Head of IR [35]

--------------------------------------------------------------------------------

So what's on Slide 12 is year-to-date. That's the trade.

--------------------------------------------------------------------------------

Robert Maj, IPOPEMA Securities S.A., Research Division - Analyst [36]

--------------------------------------------------------------------------------

And in 21, is that your -- is that your forecast of the realized price, or no?

--------------------------------------------------------------------------------

Henryk Baranowski, PGE Polska Grupa Energetyczna S.A. - President of the Management Board [37]

--------------------------------------------------------------------------------

That's as usual. The prediction of the energy price is quite clear. We still have -- the year is almost finished. We still have some volume to sell. But the price quoted, we expect that it will be realized as well.

--------------------------------------------------------------------------------

Emil Wojtowicz, PGE Polska Grupa Energetyczna S.A. - Vice-President for Finance [38]

--------------------------------------------------------------------------------

So whereas the first one on Page 12 is the base, so this one is the entire profile.

--------------------------------------------------------------------------------

Robert Maj, IPOPEMA Securities S.A., Research Division - Analyst [39]

--------------------------------------------------------------------------------

I'm just wondering because the price is still higher than what we can observe right now, and this is despite the fact that there will be a pressure on margins because a more efficient generation powers will be included that housed the ones that are still in the merit order. But indeed, these are your powers. So I would assume that you are the beneficiaries of the fact that you have launched the new power generation assets. That's why I don't understand the decrease in the margins.

--------------------------------------------------------------------------------

Emil Wojtowicz, PGE Polska Grupa Energetyczna S.A. - Vice-President for Finance [40]

--------------------------------------------------------------------------------

This is the price, not the margin. Yes, it's the price. But assuming that CO2 is flat, CO2 price don't go up, the prices don't go up, but it's precisely CO2. You cannot say that the average price in 2019. In the year when we buy CO2 with a view to the sales of energy in 2020, that average price has been similar to the average price as quoted in 2018 for 2019.

--------------------------------------------------------------------------------

Robert Maj, IPOPEMA Securities S.A., Research Division - Analyst [41]

--------------------------------------------------------------------------------

And what will be the average realized price for '20?

--------------------------------------------------------------------------------

Jakub Frejlich, PGE Polska Grupa Energetyczna S.A. - Head of IR [42]

--------------------------------------------------------------------------------

Well, we'll show you. Well, since our contracting is still open, we're not ready to share it yet, but for 2019, the average -- the price was of roughly EUR 17. And it's actually been linearly correlated to the market price as weighted by the exchange volume. So probably shifting a greater share for the next -- for the second semester. So we're probably expecting several euros increase less the allowances.

--------------------------------------------------------------------------------

Emil Wojtowicz, PGE Polska Grupa Energetyczna S.A. - Vice-President for Finance [43]

--------------------------------------------------------------------------------

In our prospects, in our outlooks, we can clearly see that the margins for 2020 are lower. Let me repeat this.

--------------------------------------------------------------------------------

Robert Maj, IPOPEMA Securities S.A., Research Division - Analyst [44]

--------------------------------------------------------------------------------

Okay. But when it comes to volumes, because [Belchatów] will no longer be under whole. There's Opole and Turów. So the volume should be higher. I'm just wondering how much you should -- how much increase you should assume. Is it going to be high? Or are we talking about 2 digits year-on-year?

--------------------------------------------------------------------------------

Henryk Baranowski, PGE Polska Grupa Energetyczna S.A. - President of the Management Board [45]

--------------------------------------------------------------------------------

We wish that our generation assets should work in full swing, but it does not fully depend on us. It's up to the grid operator who can limit us or summon us to work.

--------------------------------------------------------------------------------

Emil Wojtowicz, PGE Polska Grupa Energetyczna S.A. - Vice-President for Finance [46]

--------------------------------------------------------------------------------

But physically -- just to describe it physically. As we take a look at the graph on Slide 12, you can see that the imports have increased since May, let's say. But even if we assume that this is the new stability status, so high imports, then it is going to mean some pressure on our assets. And indeed, as the CEO has said, our assets are available for generation. Now it depends on the grid operator, how they use them.

--------------------------------------------------------------------------------

Robert Maj, IPOPEMA Securities S.A., Research Division - Analyst [47]

--------------------------------------------------------------------------------

Okay. A couple of words on the next segment, district heating, excluding the one-off event this year. There shouldn't be so much pressure on conventional -- on the renewable energies as on conventional.

--------------------------------------------------------------------------------

Emil Wojtowicz, PGE Polska Grupa Energetyczna S.A. - Vice-President for Finance [48]

--------------------------------------------------------------------------------

Yes, that's right.

--------------------------------------------------------------------------------

Robert Maj, IPOPEMA Securities S.A., Research Division - Analyst [49]

--------------------------------------------------------------------------------

And when it comes to supply, the fact that this arrow is pointing downwards, it stems from the high base effect and the provision reversal.

--------------------------------------------------------------------------------

Emil Wojtowicz, PGE Polska Grupa Energetyczna S.A. - Vice-President for Finance [50]

--------------------------------------------------------------------------------

That's right.

--------------------------------------------------------------------------------

Robert Maj, IPOPEMA Securities S.A., Research Division - Analyst [51]

--------------------------------------------------------------------------------

I have another question on the Klaster. Is this a project pursued without any support? It's the one that has won an auction. Will you be also taking part in the renewable auctions?

--------------------------------------------------------------------------------

Jakub Frejlich, PGE Polska Grupa Energetyczna S.A. - Head of IR [52]

--------------------------------------------------------------------------------

Not at the scale that would be similar to that. We have photovoltaic farms in our portfolio that might take part in this, but they are at an early stage. So at this stage, this is a significantly lower scale. And when it comes to wind farms, we will not be taking part in it.

--------------------------------------------------------------------------------

Robert Maj, IPOPEMA Securities S.A., Research Division - Analyst [53]

--------------------------------------------------------------------------------

I have a last question about the offshore. What will be the next -- the newsroom and the next steps, and when will the first wind farm be commissioned?

--------------------------------------------------------------------------------

Henryk Baranowski, PGE Polska Grupa Energetyczna S.A. - President of the Management Board [54]

--------------------------------------------------------------------------------

At this moment, we are at the stage of negotiations with Ørsted in terms of their involvement, the terms and conditions of their involvement in this project. And notwithstanding those negotiations, we're involved in all sorts of environmental tests, geological tests. We will be commissioning the tests of the seabed. And I wish for the status ready-to-build to be achieved at the turn of 2024.

--------------------------------------------------------------------------------

Michal Kuzawinski, JP Morgan Chase & Co, Research Division - Research Analyst [55]

--------------------------------------------------------------------------------

Michal Kuzawinski, JPMorgan. I have a question. How do you envisage the opportunities for the company connected with the changes in the government, where we've gotten informed about the changes to the government and what could this mean in terms of the energy mix in 2020? What about the atomic energy? We can see also a new Ministry of Climate. Will it mean more support for renewables? I realize this is a difficult question.

--------------------------------------------------------------------------------

Henryk Baranowski, PGE Polska Grupa Energetyczna S.A. - President of the Management Board [56]

--------------------------------------------------------------------------------

Although the question is difficult, but the answer is pretty much straightforward. We don't comment on political events.

--------------------------------------------------------------------------------

Michal Kuzawinski, JP Morgan Chase & Co, Research Division - Research Analyst [57]

--------------------------------------------------------------------------------

Okay. But in terms of your intuitions, how do you envisage the company?

--------------------------------------------------------------------------------

Henryk Baranowski, PGE Polska Grupa Energetyczna S.A. - President of the Management Board [58]

--------------------------------------------------------------------------------

In our work, we try to -- we try to base our work on the hard facts rather than intuitions, although the gut feeling can also be an important element. But the departure of such a personage as Mr. Tchórzewski might also mean a change in the vision of energy for the country. Let's wait for the new government to take shape and then speak out about the energy.

--------------------------------------------------------------------------------

Jakub Frejlich, PGE Polska Grupa Energetyczna S.A. - Head of IR [59]

--------------------------------------------------------------------------------

Okay. We still have additional questions. Pawel?

--------------------------------------------------------------------------------

Pawel Puchalski, Santander Brokerage Poland, Research Division - Head of Equity Research Team [60]

--------------------------------------------------------------------------------

Once more. Since we're discussing all the segments in such detail, there's such a secret segment consolidation adjustments which can introduce some turmoil in the consolidated EBITDA. So let me just ask you about the consolidation adjustments in 2020. Are we going to talk -- are we talking about an increase or a decrease?

--------------------------------------------------------------------------------

Henryk Baranowski, PGE Polska Grupa Energetyczna S.A. - President of the Management Board [61]

--------------------------------------------------------------------------------

Okay. There are no stupid questions, so they say or so they say.

--------------------------------------------------------------------------------

Emil Wojtowicz, PGE Polska Grupa Energetyczna S.A. - Vice-President for Finance [62]

--------------------------------------------------------------------------------

Well, most frequently, there are 2 elements there. In 2019, I think they have grown. I mean the amounts in this segment have grown as compared to the previous segments. There were 2 important elements. The first one, our provision reversals for Supply. I don't know if you want to hear a lecture on this, out of curiosity, but whereas those provisions were in supplies, they were reversed for the entire group.

So whereas the provision in -- it was established in 2018 and it decreased the result for the Supply segment. Then the results were positive in conjunction with that provision. And since -- and as the provision was reversed in 2019, there was a minus in the consolidation adjustments, and we're not planning on any provisions in our outlook. Basically, we're not planning to set up any reverse, and we're not expecting that there's any need to open any provisions in Supply.

Another element that has been mentioned today also, PGE Paliwa, PGE fuels company. It also delivers coal to our segments such as Conventional Generation and District Heating. If it presents a result on contracts or on supplies, I mean that entity with our group companies, then this result has an impact on the segment and it's reversed through adjustments.

--------------------------------------------------------------------------------

Pawel Puchalski, Santander Brokerage Poland, Research Division - Head of Equity Research Team [63]

--------------------------------------------------------------------------------

You mean that, that segment will be stable in 2020?

--------------------------------------------------------------------------------

Emil Wojtowicz, PGE Polska Grupa Energetyczna S.A. - Vice-President for Finance [64]

--------------------------------------------------------------------------------

No, no, far from stable, by no means. I mean even if we assume that there will be some movements in the coal part -- some changes to the coal parts, they will be reversed on a 1:1 basis in the adjustments.

And the part relating to intra-group supplies, as of today, we don't expect any such adjustments that would involve provisions in the Supply segment. So at least in 2019, well, you could juxtapose those 2 segments, supply and consolidation adjustments. Thank you very much.

--------------------------------------------------------------------------------

Pawel Puchalski, Santander Brokerage Poland, Research Division - Head of Equity Research Team [65]

--------------------------------------------------------------------------------

Okay. One more question about the offshore program. Can we have a CapEx approximation? Is it roughly PLN 15 billion per 1 gigawatt? Is that a right approximation?

--------------------------------------------------------------------------------

Henryk Baranowski, PGE Polska Grupa Energetyczna S.A. - President of the Management Board [66]

--------------------------------------------------------------------------------

We've always said, as far as I can remember, PLN 12 billion, including the connection cost, what the amount will be at the moment of starting the investment. I don't think anyone is capable of foreseeing that. We assume that the technology, which is becoming more and more universally used, will be more available and cheaper, just as it happened to wind installation on land. Let me remind you, at the end of -- in the period of 2007, 2010, those prices were very high. As of today, they are much, much lower. Then we expect that the same mechanism will occur as technologies are developed and the amount of orders grows. So if we're talking about ready-to-build in the next years to 2027, yes, that's right.

--------------------------------------------------------------------------------

Pawel Puchalski, Santander Brokerage Poland, Research Division - Head of Equity Research Team [67]

--------------------------------------------------------------------------------

Okay. And one more thing about Opole and Turów, the legacy units. When are -- when do you expect to decommission the old units? Since you have the new ones, will you be accelerating the decommissioning of the old units?

--------------------------------------------------------------------------------

Henryk Baranowski, PGE Polska Grupa Energetyczna S.A. - President of the Management Board [68]

--------------------------------------------------------------------------------

We still have not announced it in line with the law. We announced it 3 years before the decommissioning, and the operator has the right to accept our notification and they have the right not to accept our identification and our notification as well. So probably nothing much will happen in the next 3 years.

--------------------------------------------------------------------------------

Pawel Puchalski, Santander Brokerage Poland, Research Division - Head of Equity Research Team [69]

--------------------------------------------------------------------------------

The question about CO2 on Slide 7. It shows your emissions on the Siemens turbine. Is that the emissions that you're calculating for this project? And the fact that EIB means to withdraw from the support of gas projects and is also evolving in the way of not supporting gas, does it mean that you have some other -- any other expectations towards Dolna Odra and generally gas-based assets?

--------------------------------------------------------------------------------

Henryk Baranowski, PGE Polska Grupa Energetyczna S.A. - President of the Management Board [70]

--------------------------------------------------------------------------------

Well, let's wait for the decisions to be made by the European Commission in terms of gas as the energy factor. As of today, it looks as though the European Commission wants to withdraw from gas for large generation units. As of today, our project does not seem to be at risk when it comes to the funding feasibility because the emissions, I'm not sure if it's the Siemens emissions or any other manufacturer, I think it's generic for this class of units. And please remember that we are part of the auction on December 6. And hopefully, this auction will provide us with an answer on how much profitable those assets will be over the next 17 years as of the date of its commissioning.

--------------------------------------------------------------------------------

Pawel Puchalski, Santander Brokerage Poland, Research Division - Head of Equity Research Team [71]

--------------------------------------------------------------------------------

Supposing you don't win the auction. Is this project going to be profitable without the support from the power market?

--------------------------------------------------------------------------------

Henryk Baranowski, PGE Polska Grupa Energetyczna S.A. - President of the Management Board [72]

--------------------------------------------------------------------------------

The most negative scenarios, as of today, show that this project is profitable. Of course, there's one changeable, one variable that we're not convinced about that. These are the gas prices for -- until 2024 and negotiations and work is still underway in terms of this. Thank you.

--------------------------------------------------------------------------------

Emil Wojtowicz, PGE Polska Grupa Energetyczna S.A. - Vice-President for Finance [73]

--------------------------------------------------------------------------------

Perhaps one more question on the work segments because I've checked it. In the meantime, the largest change for supply is in terms of the margin for final recipients quarter-to-quarter. Thank you very much.

--------------------------------------------------------------------------------

Jakub Frejlich, PGE Polska Grupa Energetyczna S.A. - Head of IR [74]

--------------------------------------------------------------------------------

And please feel invited to informal talks. Thanks to all those who have accepted our invitation for the substantive discussion, and thanks for watching us online. And we will present to you the annual results going forward. Thank you very much.

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