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Edited Transcript of PGE.WA earnings conference call or presentation 25-Sep-19 8:00am GMT

Half Year 2019 PGE Polska Grupa Energetyczna SA Earnings Presentation

Sep 30, 2019 (Thomson StreetEvents) -- Edited Transcript of PGE Polska Grupa Energetyczna SA earnings conference call or presentation Wednesday, September 25, 2019 at 8:00:00am GMT

TEXT version of Transcript

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Corporate Participants

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* Emil Wojtowicz

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

* Jakub Frejlich

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

* Ryszard Wasilek

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

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Conference Call Participants

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* Pawel Puchalski

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

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Presentation

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

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Good morning, ladies and gentlemen. A heartfelt welcome to the presentation of the financial and operating results of the PGE Group after the first half of the year of 2019. First half of the year, even though the weather shows that it's way lower, but for significant reasons, we had to postpone it which will be discussed later on.

And traditionally, we will deliver the presentation and then we'll hold a Q&A session. Traditionally, we'll give over the floor to the room, the guests in our room first, thanks for turning up, and then you can ask the questions online. Traditionally, if they recur, I won't be reading them. If those questions go beyond our time frame, we will address them in a written form.

So without further ado, let me present the gentlemen at the table, Mr. Ryszard Wasilek, Vice President for -- COO; and Emil Wojtowicz, CFO. My name is Jakub Frejlich, Investor Relations.

Over to you, gentlemen.

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Ryszard Wasilek, PGE Polska Grupa Energetyczna S.A. - Vice-President for Operations [2]

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Good morning, ladies and gentlemen. Due to the position I occupy, I would like to tell you some operating -- share some operating issues connected with the functioning of PGE Group. We'll start with a slide you're aware of. Those data were published yesterday, and the figures presented there are -- you should be familiar with them.

The first half of the year was ended with an EBITDA of PLN 4.4 billion; net profit, PLN 1.8 billion. Looking at what happened in Q2, you can see the green figures as compared to the previous year. Very significant, but the details will be shared with you by Mr. Emil Wojtowicz where those very good group results stem from, I will focus on the operating items.

In the first half of the year, the generation was of 29 better than the previous year; distribution 18. So pretty much what we delivered last year over the same time frame. Retail sales, 28 petajoules, minus 1% vis-à-vis the previous year, and I will discuss it later on.

Q2 was characterized by -- in terms of the heat sales, that they were much higher than expected. This stems from a slightly colder turn of May. Usually, temperatures tend to be higher at that time. Contrary to the previous years, the heat sales were much higher in energy. In terms G in Q2 was 13.9 terawatt hours, 9% lower than in the previous year.

As regards to the structure, it's important to say what you can see on the slide, the situation is in the national power system which is important. Once we get acquainted with the situation in the national power system, you -- it will be easier to get to PGE Group even though we represent a very high share in the generation and distribution both of District Heat and power. This is important.

So on a year-on-year basis, as you can see, the change in energy consumption was of 0%. So practically nothing much changed in terms of the consumption. But -- which is very important from our point of view, not only our point of view. Wind generation change was 1.5 terawatts hours more than in the prior year, and the imports by 0.8. And these 2 elements are very crucial and they translate into how the entire group functions and how we generate, especially in conventional energy, what the production is.

In terms of the wind, I will tell you later on about this, also owing to having quite large eolic resources, we also benefit from that. 10% is -- was the factor by which the generation was larger than in the prior year, which is split in terms of lignite 12%; hard coal, 15%; and the remaining ones, 15% more. As we look at the other elements in terms of wind, 28% more than in the previous year which shows that the impact countrywide of 1.5 terawatt hours also translates into our windmills. So we have 550 of power active in wind farms.

Gas, natural gas was neutral in the first semester. Of course, it will be slightly different for the last quarter. I will tell you more about it. Talking about the colder April and May and all our cogeneration plants are gas-fired.

Pumped storage, much more than expected vis-à-vis the previous year. Wind, 28 hours -- 28%. That's very favorable, very favorable weather conditions caused that among the -- we had a much better energy output from the resources. We had biomass, 14%. That's also a very good element. In this slide, we're not showing this because you can see in the small print, 0.03 (sic) [0.02] terawatts hours. We commissioned the waste incineration plant in Rzeszów and this is the element connected with the energy obtained from that installation in Rzeszów.

Q2. In Q2, we had a similar situation when it comes to District Heat. It was quite untypical as compared to the prior year. In Q2 only, as regards to the production of 9% -- it's 9% less; lignite, 13% less; hard coal, 7% less; and 11% in natural gas. Wind, 8% better because the favorable weather conditions were rather in Q1 than in Q2. This translates in terms of hard coal, there's 28 megawatts in Belchatów; Turów, less 32 (sic) [34] in Turów. This was also impacted by time the devoted to overhauls in lignite, that's 1,900 hours more in Belchatów and 250 hours in Turów.

In terms of hard coal, we also has smaller load factor in Opole, minus 45 megawatt hours. We're talking about units 1 to 4 because we will still be talking about the newer units, but it was also impacted by the larger number of hours. We expect in overhauls in Opole over 3,000. And the standby in reserves in Dolna Odra, that's a special power plant that has special contracts with PSE, and there the reserve standby was much higher on a year-on-year basis to -- it's plus 2,800 hours, which also impacted the generation base on hard coal. All the other arrows are green. So everything that involves natural gas, wind and pumped storage worked much better than we expected both in terms of planning and on a year-on-year basis.

Now a couple of slides about our investments and their status as well as their impact on the current relationships in terms of generation. Our flagship projects connected with Opole is almost finished. We're finishing unit 5 and 6. Unit 5 was commissioned on the 31st of May. It's up and running, 900 megawatts are up and running in Opole. Unit 6 will be working hopefully as of September 30, so actually on Monday. The monthly -- or 720-hour continuous work period is coming to an end. Since it's been going on without any disturbances, then Monday, the 30th, is also the time when Unit 6 will also be commissioned.

So in Opole, we will have an extra 160 megawatt hours extra given the efficiencies which are much higher than envisioned because it's overcritical. So the efficiency will be much higher, the emissions will be much lower. And because they will work on a nonstop basis, so the new capacities in Opole will mean that our competitive advantage will be much, much higher in that locality.

To wrap it up in Opole, we're talking about September 30 and May 31 have been met. So hopefully, the units which are still -- we'll still be working on them because there are some issues that calls for the consortium to still stay with us on the construction site after September 30. But those units are up and running. And well, there are always some minor issues in such situations which does not pose any threat to the availability of those units.

The Turów project, after the new appendix should be commissioned in October next year. And this is the new deadline which factors in the new waste treatment plant now. It's going without any disturbances. Of course as in every construction site, there are some minor issues. But I think that the consortium, we have another meeting on Monday with [Tecnicas]. Some of the issues will be taken. So as of today, we're not declaring any changes with regard to commissioning that unit in October 2020.

On September 19, the applied voltage was -- voltage was applied of 110 kilowatts. So we can start the intensive start-up phase of individual devices so that at the turn of next year, we could start the combustion of the unit boiler. So all the devices, and first of all the unit, could be checked for the efficiency of its execution as well as all the elements. And there are thousands of such elements, so I don't think that those deadlines are under any threat. And October next year will be a delight to be met.

Now a couple of slides about how PGE Group is transforming how we are learning our lessons with regard to CO2 prices which we don't expect to fall. The recent volatility has stabilized. Hence our decision to adjust its assets to the situation that we're facing. Hence, the slides which we will be showing you later on show you how the group intends to work going forward in the near future.

The first one is the Klaster project after the recent act of law. That's a major project of about 9 megawatts. It's pretty much advanced right now. The information that you have here testify to the fact that also the deadline contemplated for Q1 2020 will be met because the rate of assembly of those windmills is satisfactory enough for us so much so that we believe that both the deadline will be met as well as the new 19 megawatts will increase our capacity in wind generation by another 100 megawatts.

All the other elements connected with assembly, all the access roads, all the supply is performed. The line of 110 KW is about 40 kilometers. It will be performed by the end of the year. So at the moment, it's -- when we launched the project Klaster, it's composed of several locations. We will be able to do it after Q1 2020. That's the first element of that element.

And the second element, we want to be the leader of development in photovoltaic plants. Our plants are very ambitious. Since we're all aware of the Energy Policy project by 2040, and we wish to comply with the assumptions of PEP2040. Our ambitions are that out of this 10.2 gigawatts, we should have 25% of the power contemplated therein, so we're talking about 2,500 megawatts.

As of today, that project was launched in spring. Since so far we approach this problem in a slightly different way. Now we've changed our policy altogether and we decided -- we have decided that this was a very important project. Hence, our determination to accomplish it by 2030.

Recently, we also informed you about this. We concluded several contracts with KGHM, with PKP Polish rail, and we also have some letters of intent prepared with the next owners of large land. Because to build 2.5 megawatts in wind, you have to multiply it by 2, you need 2 hectares per 1 megawatt in photovoltaic. So we have to have very large areas of land under control. So this project is pretty much advanced and we expect the next investment projects next year.

As of today, actually 750 megawatts, so the land that we've checked for urban or rural planning, possibilities of applying supply -- or providing supply. These are the pieces of lands that will allow us to perform the works because that land already meets the requirements. We're working on the next ones. And this is a project which will be still very much operated by us. And we can see the opportunities of development in our group of PV power plants, 2,500 megawatts, that's really a lot.

Apart from the investments in PV farms, we're also learning our lessons, as I said before, from the very high CO2 prices. Hence, we've decided to build 2 new gas units in Dolna Odra, which is a location very close to [Czechnica] and the new outlet of the Baltic pipe. Hence, the decision to locate both gas units in Dolna Odra. Dolna Odra, as I said, it has special units with the national power system. So we believe that those units will also meet that role, except for the role contemplated for us. It will be a backup vis-à-vis the development of the PV farms.

The situation as of today is that we've launched a tender. We expect the bids in October, and we expect that by the end of the year we will be able to choose the partner to build that power plant. Also by the end of December, we will also submit those 2 units for the auction.

Any contracts connected with the connection with the national power system, connected with the gas connection, are almost finished today. The GK Supervisory Board is making the decision on approving. Thus, we're talking about 60 kilometers of gas supply, 300 -- between -- also that's a huge investment to us and to GAZ-SYSTEM's. So hopefully, we will be able to commission them by the 1st of January 2024.

Other than this major gas investment, the group will also be involved in slightly smaller gas-related investments. Among the largest ones, at Czechnica, a total shift from hard coal to gas. Czechnica is near Wroclaw. And also in Gdynia, Kraków, [Zgierz], Kielce, Bydgoszcz, these are the locations where you need to -- if you need to replace the current coal-fired plants into some elements connected with the finishing of the operations. That's the moment when we switch to natural gas, and the locations I mentioned are examples of where such transformation from coal to gas will be performed. And those projects are very much advanced after the corporate approvals.

The next project is the offshore project. This is also a very important project for us, so much so that we've incorporated a separate PGE Baltica company, which is -- which directly reports to PGE Group rather than PGE EO because it's a very important project for us. And from this point of view, we wanted to make sure that we can directly supervise the offshore project.

This is a project, as of today, we have 3 islands, Baltica 1, 2 and 3. We are starting reversely from Baltica 3 then 2 then 1. And as of today, in terms of our -- we'll be talking about 124 megawatts. In Baltica, about 900, and in Baltica 1 about -- sorry, it's 1,000, 1,500 and 900. All in all, about 3,500 of offshore megawatts -- thousand megawatts. So we're talking -- that's not over because we're still contemplating an even greater growth of the offshore project of the Baltic Sea.

Since this is a thing where we decided to cooperate with an external partner, as you will know, we've also launched -- well, announced this need and invited the major companies with the largest potential. And out of them we've chosen 4 that have submitted initial bids. Those 4 companies have submitted binding bids. We've received them already. And we believe that by the end of the year, we'll also choose the partner for the first project connected with Baltica 3.

And the period between submitting the bid and the year-end seems to be long. But it's short, in fact, because those bids contain many elements and you have to analyze them on an in-depth basis to make a very perspective choice of a partner for the projects we wish to accomplish and they are not small.

An additional element, which I'll show, also shows the direction in which PGE Group is changing. This is the establishment of the FIZAN Eko-investments with 3 business lines. So as you can see, it's PGE Energia Ciepla, PGE GE and PGE Energia Odnawialna renewable energies. This project has been launched already. We expect PLN 1.5 billion in terms of the target value of the fund, and it will be used for all the environmental projects. And we also believe that this is one of the new elements in our strategy to use the resources only for those projects, which are aligned to the transformation of the company in another direction than it was functioning so far.

And the last element that I wanted to tell you about is grid grounding. Of course, in terms of the grid grounding, we're talking about such work connected with better SAIDI/SAIFI. We've been involved with this for years. However, this slide shows that we wanted to do -- to wrap it up. We wanted to have about 20% of the Baltics to be grounded. Right now, our ambition is to have 30%. We wish to achieve 30% by 2023 which will allow us to improve SAIDI/SAIFI, those quality ratios that impact the comfort of power received by our 5 million recipients.

We believe that this program -- since the worth of the program definitely exceeds PLN 1 billion, we've also decided that it's one of our mega CapEx projects. And we've also created an appropriate structure because we believe that the comfort of our recipients is very important and we wish to oversee this project in a special way. So to achieve the goal of 30%, we believe that our activities are necessary.

And the right has been given to this project. This propulsion at this moment, we're at the stage of analyzing it on a very broad basis because to analyze this program we need a lot of building permits in various places. And this is all underway. It needs distribution office. This project is underway and we believe to be able to accomplish this in line with the assumptions contemplated so far. This is PLN 1.9 billion more than previously assumed of the 25% grid grounding. And all of this will be put in the tariffs if the president of the ERO thinks it proper.

That's all for me. If you have any questions after the presentation from Emil, I'm ready to take any questions. Over to you.

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

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Good morning, ladies and gentlemen. Well, I think everything has been said already, so we can pass on to the Q&A session already.

But since I'm here, I'll tell you a couple of things. The COO has already wrapped up the developments in the market or actually what has happened to the system. Let me wrap it up with one more sentence. As we will remember, in Q1, the consumption was lower. However, it was very windy, so we derived half of the energy from windmills. In Q2, the consumption was much higher, so it's almost neutral for H1.

However, in Q2, a large amount of energy was derived from imports. We can see the red curve much higher than the blue curve. The red curve is the domestic consumption and the blue curve is the total generation, imports plus exports if conversely. This is very important because I'm just explaining what Ryszard was talking about, how it impacts the generation volume, the volume of the energy generated by us, which also impacts on our financial results.

As regards the market situation, the market prices, you can see that both the quarter and the semester was quite stable. There were no such major changes or increases as in the previous year. The average forward price for the next year is of about PLN 270. One of the main reasons being that the CO2 prices did not change all that much. They're pretty much stable, although their level is rather high.

However, if we take a look at the spot prices which respond to various changes in the system even more, we noticed one thing that those changes on a year-on-year basis, so that's due to -- compared to Q2 of the previous year or the same exercise for the entire semesters indicate that the energy price has grown less than indicated by the CO2 price. So it's not the entire increase in the CO2 price as the cost factor have been translated into the spot energy prices, which is one of the factors. Causing this in Q2 was higher imports, and in Q1, a higher wind generation.

Passing on to the financials, let me start with the reported EBITDA for Q2 that was PLN 2.5 billion, in the previous year for Q2 that was PLN 1.5 billion. For this semester, PLN 4.4 billion; in the previous year, PLN 3.7 billion.

One of the better results for these results were one-offs. Let me mention 2 of them, one of them being the additional CO2 entitlements, emissions to CO2 emissions, the worth being PLN 1.4 billion which increased EBITDA mostly in the generation segment and slightly in District Heating.

And next one-off was changing in the provision. This year, it was minus PLN 230 million. This change caused by -- was caused by a change in the market rates because the provision very much depends on the market rates through the discounting mechanisms of future expenditure. If today we expect next expenditure to recultivate the post-mining land, each change of the discount rate means that the provision changes its value a lot.

Passing on to the recurring EBITDA, PLN 1.4 billion for Q2 and PLN 3.3 billion for the entire half of the year. For the half of the year, it's PLN 0.5 billion less than in the prior year. And here on the recurring activity, let me quote 3 factors that impacted such results to the greatest degree. About PLN 200 million was due to the lack of revenues due to the support to cogeneration. This year, indeed, we did not recognize any such revenues. We believe that in Q2 or in the second semester on Q3, we will be able to recognize such revenues once the appropriate regulations are in place.

The second element, a smaller result in the trading power, that's about PLN 220 million, PLN 230 million. And the third element, higher personnel costs, about PLN 180 million. That entire amount does not correspond to the amount actually disbursed. It also includes some provisions, this time actuarial provisions.

A couple of words about what impacted our most important segments. For generation, we can see the increase in the prices, also for the increase in CO2 prices as well as coal. These factors, even despite the lower generation, meant that -- the lower output meant that the generation margin was roughly the same. And hence, recurring EBITDA for the generation was maintained for H1 at the level of PLN 1.3 billion.

For the District Heating, we will remember that the costs are not entirely translated in the tariff for District Heating. However, owing to the higher energy prices, the total revenues for heat and electricity have allowed us to again obtain the same margin, and the EBITDA result would be probably similar if the revenues due to the yellow and red certificates have been similar.

In terms of distribution, we had a slightly higher volume and slightly higher revenues, but also higher costs due to electricity to cover the balancing losses. So these 2 factors actually neutralize each other. Higher personnel costs was the factor which caused for the EBITDA on distribution to drop to PLN 1.2 billion vis-à-vis PLN 1.3 billion in the previous year.

Let me also draw your attention to the fact that since the beginning of Q1, our indebtedness dropped by PLN 1 billion, which was caused by the fact that, today, we are buying more CO2 in forward transactions rather than based on spot transactions. Hence, the expenditures is less. At this moment, our indebtedness amounts to PLN 11 billion which gives us an EBITDA -- debt-to-EBITDA ratio of 1.55. And in terms of recurring EBITDA, it's 1.8.

It's probably worth mentioning that due to the fact that the start-up phase of Opole, also the expenditure on Opole on that project, is almost finished. However, we are already obtaining some revenues and earning margins although part of it can be seen in the revenues and part of it is recognized as a reduction in the expenditure. But on a cash basis, both of those units contributed to about PLN 140 million in margin.

That's a repetition of what I discussed in different form. The higher revenues due to energy owing to higher prices have allowed us to cover higher both CO2 emissions as well as fuel. All in all, in all the 3 segments generating energy, the impact is of 1 -- plus 153 million. I've also mentioned the margin in the energy market, I've also mentioned the support for cogeneration. And let me only repeat in terms of the personnel cost, the personnel costs have grown in total by PLN 186 (sic) [176] million whereof about PLN 120 million is derivative of the actual disbursements, so salaries and the like. And the rest of it is connected with the provisions connected with our employees.

A couple of words on the availability of our generation assets. In terms of hard coal, the availability was slightly less than in the previous year. The overhaul of unit number 2 in Belchatów triggered that, and the power utilization ratio was much less. Why? We've mentioned that already. Our power plants are significantly less used by the system firstly because of the higher windiness and secondly owing to the higher imports; and secondly, by how the operator operates the grid in terms of hard coal availability and energy utilization was lower. There was the overhaul of unit number 2.

In the ratios, you can see here, you don't see the generation of Unit 5 and 6. So probably if they were here, then the results would be -- the figures would have been different. You can say that the generation from the older units in Opole 1 and 4 have been taken over by the start-up and testing work of the new units.

In terms of the eolic assets, we know that, first of all in Q1, it was more windy, hence, the higher capacity factor. However, lower availability owing to the scheduling of the overhaul.

In terms of distribution, what it looked like, as we will remember, in the entire system it was balanced. We're slightly in the red. Our distribution shows a slight plus about 1% or 0.8%. Network losses are being lowered on a stable basis. The SAIDI and SAIFI results mostly stemmed from what was happening in Q1 in March. And there, the high parameters still translated into the values for the entire semester.

Since there's work underway on changing the model for requiring quality from the operators, we expect that such events will be excluded from the measurement of such ratios. The connection time dropped below 200 days again, and in this way we are meeting the required ratios, the regularity of those targets.

In terms of CapEx, the 3 main items, 30% each roughly: It's 30% for the development of generation, that's Opole and Turów; 30% for the existing assets, renewals of existing assets; and 30% for distribution. What was mentioned by Ryszard about the Klaster will be probably visible in the second half of the year.

These data or this graph maybe does not convey the development of the work so much, it's rather about the advancement of the payments. So in distribution, we spent much more this year in distribution than previously owing to the expenditure or the fact that distributions expenditure conditioning, the time when you can perform the work in the field.

And as usual, the forward-looking slide, the outlook for the half of the year, which is still 3 and almost a half months to go. For Conventional Generation, we believe that the reported EBITDA will be higher. We still remember that one of the main reasons -- important reasons is to include the additional CO2 allowances. And we noticed how our generation assets are being used, and this might exert some pressure on our results. If it's not this year, then perhaps next year.

In terms of District Heating, there are 2 effects that roughly neutralize each other, is the fact that there will be no such support level for cogeneration as in the previous year. So the recurrent -- I will say recurrent factor, decreasing the EBITDA; however, inclusion of such assets impacting the cogeneration. These 2 factors will roughly neutralize each other and mean the reported EBITDA for District Heating should be on a stable level.

In terms of Renewables, we will remember that Q1 was good in terms of the windiness. The high prices of energy also support the results of this segment here. We expect better results than in the previous year and that was probably -- there were probably no major one-offs.

In terms of Supply, we expect a better result than in the previous year. The process connected with defining the parameters is practically finished.

For Distribution, what we can see, as what we mentioned or I mentioned, the higher operating costs will probably cause -- or continuing them throughout the second semester will probably mean that the result for the segment will be lower than what we achieved in 2018.

Thank you very much.

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Jakub Frejlich, PGE Polska Grupa Energetyczna S.A. - Head of IR [4]

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Thank you very much for your presentation. Ladies and gentlemen, over to you. First of all, so any questions? Pawel?

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Questions and Answers

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Pawel Puchalski, Santander Brokerage Poland, Research Division - Head of Equity Research Team [1]

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I would like -- okay, let's start with curiosity. There was a slide showing the offshore projects. What sort of a price per megawatt hour are you talking about? What do you want to achieve in your offshore projects?

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Ryszard Wasilek, PGE Polska Grupa Energetyczna S.A. - Vice-President for Operations [2]

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At this moment, we're trying out various price models. You will be aware that at this moment, work is underway on the legislation to support offshore projects. It's hard to treat that law as a foregone conclusion before it's even finished. But however, we are applying any and various scenarios.

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Pawel Puchalski, Santander Brokerage Poland, Research Division - Head of Equity Research Team [3]

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Is there any minimum price below which you will determine that those projects are not worth investing in?

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Ryszard Wasilek, PGE Polska Grupa Energetyczna S.A. - Vice-President for Operations [4]

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As far as the information I think from Europe, perhaps not from the Baltic Sea basin or catchment, we even see that in the U.K. you can continue investments and operations even without the support. So we believe that if we consider the work connected with the legislation, this will be a thing to make a difference for us, so much so that we will be able to deliver on this program.

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

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One more thing that we try to repeat over and over, the comparison between various systems can be slightly misleading, or the prices obtained under various systems can be misleading. Given, for instance, the fact that under the current regime, we will also be responsible for building the connection. So to put it straight, we'll have to pay for the connection, which means a much higher CapEx. So it has to translate into a higher auction price under a regime where the operator pays for the connection.

That money is not derived from nowhere, it's derived from the operator's tariff or price list or from another box, so to say.

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Jakub Frejlich, PGE Polska Grupa Energetyczna S.A. - Head of IR [6]

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To paraphrase it, it's if we're talking about apples and apples and oranges and oranges, we don't expect any other conditions because that's a scalable global technology to achieve a different levelized cost of electricity than in the case of countries that have similar regulations in place.

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Unidentified Analyst, [7]

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[I'm sorry the question was off the mic.]

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Jakub Frejlich, PGE Polska Grupa Energetyczna S.A. - Head of IR [8]

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In January or in February, we showed you a presentation where we specifically did not provide any numbers. That's a sensitive legislative process also among others. So with your permission, we will not be commenting on the nominal prices quoted.

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Unidentified Analyst, [9]

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Okay. If I may pass on to coal. I've checked your coal prices that you paid in the first semester of this year and the previous year -- actually, I don't think so, maybe it was Q2, it was H2 -- Q2, and it turned out that your coal price increased by 28%. It might stem from my calculation error, but I would like to hear an official denial or otherwise. And PGE has just proudly announced that it's selling out its supplies and it will reach the minimum inventory. So I would like to hear what your inventories are at this moment like and what are the target inventories at the end of the year.

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Ryszard Wasilek, PGE Polska Grupa Energetyczna S.A. - Vice-President for Operations [10]

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The contracts we completed, especially with (inaudible) and PGG are multiple-year quotes. This situation cannot take place -- I'm talking about year-on-year things.

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Unidentified Analyst, [11]

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Was it H1 against -- or H1 or Q2 on Q2?

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Ryszard Wasilek, PGE Polska Grupa Energetyczna S.A. - Vice-President for Operations [12]

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It was year-on-year. I don't remember whether we were talking about quarters or semesters. I think it might have stemmed from the coal firing structure because we also import coal. And the situation that occurred between the end of last year and the beginning of this year, the windiness and so on, meant that we consumed less coal.

So the structure between imported versus domestic coal might have changed and, hence, you might have this impression. But the contracts are multi-annual contracts. And I don't think there has been any change stemming coming from any changes in these. Those contracts are binding. In the case of Opole Units 5 and 6, we have 20-year contracts concluded back in 2014. Of course, it contains some elements connected with the current situation, inflation and markets. However, it's stable.

And as regards -- well, obviously, since what we showed to you and you've seen it, our generation based on hard coal and lignite was lower on a year-over-year basis. The situation has meant that we have much higher inventories than required by the chair of the ERO. And we are trying to meet the contracts with our domestic partners and to receive the coal contemplated in the contract. Hence, the higher inventory levels. However, by the end of the year, we expect to meet the requirements of those contracts, especially PGG and (inaudible), so there should be no backlog there.

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Jakub Frejlich, PGE Polska Grupa Energetyczna S.A. - Head of IR [13]

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I don't -- I'm not sure if that price has been qualified.

There was one presentation issue where we have a contract and we -- related to the cost per gigajoule, and we advised you of this level also half a year ago. And what you calculate it relates to the cost per ton, we're not capable of recalculating it whether -- just so quickly, whether it's as much as 8 percentage points because it stems from the structure of -- the coal for cogeneration plants is much more calorific, but it's hard. We expect the transfer costs will be 20 plus or roughly 20s. So these several points probably stem from that. Whether it's as much as 8, well, it's hard to tell you right now.

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Unidentified Analyst, [14]

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If I may ask you another question, what is the average price of CO2 realized be it in Q2 or in H1? What is the CO2 price in your costs? Let me just tell you -- explain why I'm asking because the profit of 1.4, well, that would imply the CO2 price of roughly EUR 29, if I'm calculating it well. And then, the question is...

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Jakub Frejlich, PGE Polska Grupa Energetyczna S.A. - Head of IR [15]

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Well, there are 2 issues. One of them being about the additional allowances that had to be valued at market prices and the second one is connected with our hedging instruments. So -- and you -- so these are 2 totally different -- we obtained additional allowances in 2018, so they're measured at current value. What we have in our costs are valued at the moment when we bought them, whether it was a contract or a spot, obviously.

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Unidentified Analyst, [16]

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However, if you recognized it at EBITDA at 29, won't it be the case that the next periods will be charged with the cost of 29? Because that's how you recognized it, so that will be charging your cost, your OpEx.

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Emil Wojtowicz, PGE Polska Grupa Energetyczna S.A. - Vice-President for Finance [17]

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At this moment, I haven't been able to find right off what the average price is as charged to the cost. But let me just comment on the conclusion. Well, luckily not because these are 2 different portfolios, so to say. The one that is appropriated to our own needs is the portfolio appropriated to our own needs and it is measured at cost. And this is the trading portfolio and it is measured at the current market value. So it's not that you can just put it from one portfolio to another to have higher or lower cost.

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Jakub Frejlich, PGE Polska Grupa Energetyczna S.A. - Head of IR [18]

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Okay. Traditionally, we have Slide 57 on CO2 and the costs attributed to the period. And there, this stems from Note 19 in the consolidated financial statements. The cost for the period is of PLN 1.8 million. So that's what you are talking about. But the costs ascribed to this stemming from the hedging policy, so that would imply PLN 59, depending on the FX rate, roughly EUR 15 including free of charge. Well, just off my head, I would say EUR 17, which makes sense.

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Unidentified Analyst, [19]

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One more question about heat. Because you've increased the guidance to flat but this guidance includes the one-off of PLN 280 million in CO2 allowances. So I understand that the heat economy has decreased so much that you expect it to drop by 33% in terms of the EBITDA, PLN 280 million versus PLN 350 million that you reported last year, that stems from your slide. So the EBITDA decreased by 33% because that stems from the flat EBITDA, and we know that it's supported a lot by the one-off CO2 certificates. Or am I wrong? Am I -- do I understand it in a wrong way?

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Emil Wojtowicz, PGE Polska Grupa Energetyczna S.A. - Vice-President for Finance [20]

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Well, let me rephrase it, perhaps if we're talking about absolute figures, EBITDA will be roughly lower by the lack of support. Because the way I was trying to explain it, the total revenues from heat, which does not increase so much and electricity allows you to cover the total coal cost and CO2 cost increase. However, the gap which is not -- which cannot be covered is the lack of revenues from the certificates.

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Unidentified Analyst, [21]

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However, the lack of revenues from certificates is a fixed phenomenon and the lack of support is a one-off.

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Emil Wojtowicz, PGE Polska Grupa Energetyczna S.A. - Vice-President for Finance [22]

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Yes, we fully agree. So let's enjoy the strong performance in 2019.

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Jakub Frejlich, PGE Polska Grupa Energetyczna S.A. - Head of IR [23]

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But for the outlook that we update each quarter, we provided it with a negative guidance. We are -- we did it for a reason. And now we are showing you a flat guidance. Well, we've known the regulatory factors. The quantification is something we've been aware of. We are still waiting for the next acts of law that will allow us to show how much we will be able to recognize in this year's results, which we are expecting. This is not included in this guidance.

There's one more factor we have a granddaughter company, the Rzeszów cogeneration, which still receives support KDT, which is like a wager against the increase in energy. So if the energy prices increases then that wager changes, and it changes in such a way that our future expectations for future compensations are verified in minus. So each quarter, we have to translate the difference between the end of the KDT, that's in '24, and the current expectations. So the accumulated difference is included in this year's -- in the current results. And that's several dozen million, which also makes the result change.

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Unidentified Analyst, [24]

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[If someone is asking any questions, they are not using the mic. I'm sorry I cannot hear the question.]

The question is whether a new compensation system will appear.

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

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That's between which lines? Because I didn't figure out -- that's what you're -- are we talking about District Heating? Well, then we are waiting. The act of law is in place. We're waiting for the regulation. And for the existing assets, it will not be as generous. It will not provide so much support, as it was the case previously. And for the new ones, we will be calculating it on a case-by-case basis about how the support impacts the economies of investments in the next locations. But you cannot expect it to be as generous as the yellow and red certificates have been. For the existing assets, yes, you can say that again, that's true.

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Unidentified Analyst, [26]

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And well, since we've delved on District Heating so much, one more question about 2020 because we know what the tariffs look like in District Heating. Right now you had the low coal prices included in your prices given that coal have been going up. Can you expect that this trend will be reversing in 2020? So the more expensive coal will be included in the tariff or in the next year?

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Ryszard Wasilek, PGE Polska Grupa Energetyczna S.A. - Vice-President for Operations [27]

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It should appear in the coal prices but also CO2 tariffs because we have to remember that in generation this is ratio-based, and hence, the delay in the grids is based on the costs and then it's easier to include it. In the case of our locations, Gorzów and Turów where we have both generation and the District Heating, it does not make any difference because it's one cost base.

But in other locations, it does struggle for the looping. You're right, they are ratio-based and they come with a delay. And now we're involved in negotiations with the chair of the ERO through various industrial chambers to change that.

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Unidentified Analyst, [28]

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So both for coal and CO2? So would you venture to say that 2019 was valid?

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Ryszard Wasilek, PGE Polska Grupa Energetyczna S.A. - Vice-President for Operations [29]

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Yes, definitely. The tariffs for 2020 will include a higher CO2 and coal prices. Thank you.

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

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We have no further questions from the floor.

One more, he got an e-mail from his head office.

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Unidentified Analyst, [31]

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Okay. Let me go back to the slide, the last slide on the first part about the grid grounding. It was mentioned both about the CapEx of...

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Jakub Frejlich, PGE Polska Grupa Energetyczna S.A. - Head of IR [32]

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Before you -- I'll find it. Before you find it, PLN 3.5 billion is the total cabling costs including the value of the previously planned CapEx. And this PLN 1.9 billion is the delta between the previously included 25% and 30%. So PLN 1.9 billion is the delta.

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Unidentified Analyst, [33]

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So is that to date that you're talking about? Meaning to invest, what, an additional PLN 1.2 billion? Or have I missed something?

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Jakub Frejlich, PGE Polska Grupa Energetyczna S.A. - Head of IR [34]

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Well, actually, we've been talking about it for roughly half a year, and today we're showing you this slide straightforwardly. Yes, PLN 1.9 billion is an extra expenditure.

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Ryszard Wasilek, PGE Polska Grupa Energetyczna S.A. - Vice-President for Operations [35]

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At this moment, we're waiting for the development plan to be approved for the distribution. If approved, then these additional funds for grid grounding will be included in the distribution tariff.

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Jakub Frejlich, PGE Polska Grupa Energetyczna S.A. - Head of IR [36]

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So we are comparing to what we talked about so far. That's an additional PLN 2 billion, PLN 2 billion. So we talked about roughly PLN 1.8 billion, now we're talking about PLN 2.3 billion -- PLN 2.2 billion, PLN 2.3 billion.

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Unidentified Analyst, [37]

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And one -- and most important question, what is your plan about the dividend payout next year?

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

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Obviously, it's still valid. It still applies. I mean the policy -- the dividend policy still applies. So we are planning on paying out -- I mean in line with that policy, we are planning to pay out from this year's profit. I mean next year, we will be disbursing money depending on the investment plans and acquisition plans.

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Unidentified Analyst, [39]

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Then do you have any major acquisition plans in the Polish market or international markets that could disturb the expected dividend payout?

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

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It seems that, at least as of today, we have no plans that we haven't communicated so far.

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Jakub Frejlich, PGE Polska Grupa Energetyczna S.A. - Head of IR [41]

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Before anyone else gets another e-mail with questions to be asked, I was joking, obviously. This way -- or rather the conference has been extended a little bit.

Thank you for your active involvement and we invite you to another conference on the presentation of Q3 results. And please feel free to contact the Investor Relations office. And see you next time. Thank you.

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