PGE Polska Grupa Energetyczna S.A. (PGE) Earnings Call Transcript & Summary

Good morning, ladies and gentlemen. Welcome to today's conference. We will be talking about the financial and operational results after the H1 2021. We are very happy to see you in person finally. This is our first meeting since a long time. So it's very good to see you here. And we also broadcast this conference online. So I would like to welcome all the viewers who follow us online. And today, we will have Wojciech Dabrowski, President of the Management Board of PGE; Lechoslaw Rojewski, Vice President, CFO of PGE; Piotr Sudol, Financial Department Director; and Filip Osadczuk, Investor Relations Department Director. My name is Malgorzata Babska and I am the spokesperson for PGE. And I will have the pleasure of running today's conference. So the plan is as follows. So firstly, I will give the floor to Filip Osadczuk, who will present the report -- integrated report that we've published just recently, then we will go on to the presentation of H1 '21 financial results. And in the end, traditionally, we will have Q&A session. I most probably will get some questions from our online followers and questions here in the room. So this is the plan for today. And as I've said, now over to Filip Osadczuk.

[Interpreted] Welcome, ladies and gentlemen. Today, my role is a little bit different than usually but it's not an accident because the financial results are more and more important for our investors. And as part of the dialogue that we have with them, we also show them a bigger, more extensive scope of our organization and operations. And we would also like to go beyond the very close stakeholders group. And this is why we do integrate this report, and we publish this integrated report, and this will be my pleasure to communicate this report to you today. And this way of presenting information online, combining financial and nonfinancial data makes our communication better. And the first integrated report was published in 2016 and year by year we try to grow to -- we try to meet all the expectations that our stakeholders have. And this report is very special to us because we are talking about the year 2020 and in that year, we've appointed -- we've approved the strategy for our group. So it became an axis for the integrated report. And this year's integrated report tries to show the milestones that we've achieved in implementation of our strategy. And year-by-year, we also show how this strategy will affect the whole model of our group which will transform the PGE group in line with what is happening globally. So we do not focus on just business-related operations. We also show other aspects of PGE operations in line with ESG concept, so environmental, social and corporational aspects. So in this report, we present to you how we understand the sustainable development concept. We -- at this moment, we are determining the rules of management that will ensure balance between environmental, social and economic aspects. So the description of management is not just our corporational order structure but also relationships and cooperation with business partners, compliance, communication of any irregularities. So economic aspects are treated more extensively than just return on invested capital or financial results for us or our shareholders. We try to show how we influence the economy, what kind of signal we give to the economy, and what are the tax revenues generated by individual, local authorities or local governments in connection with our operations. So social aspect; we identify all social groups that we affect, so our clients, local communities and how we act for them. And finally, being a big company that affects the nature, natural environment, we show what kind of influence we have and what kind of measures we undertake in order to alleviate -- to remove it too. So I only hope that everyone who is interested in PGE operations will find something interesting to read. Thank you for your attention, and I encourage you to read our report. Thank you so much for this presentation. And of course, I also encourage you to visit our website. Please go and visit it. We present a lot of information there. And now in line with our agenda, we will move on to financial and operating results after H1 2021. And now I give the floor to Wojciech Dabrowski, who is the President of the Management Board.

[Interpreted] Thank you so much. Good morning, ladies and gentlemen. Please allow me to refer to the integrated report in just a few words about that. Our journalists and analysts received it via our website and integrated report is just one of the examples of our transparency; transparency of our operations and this is the way to meet the concept, the social, economic and environmental concept. And today, we took part in carbon disclosure project survey, providing information about the environmental changes and water resources. So this is actually a new thing and the effects of our works will be presented in 2021 integrated reports, this will be the next report. And I know that our investors have this kind of expectations. We've received this information. So we respond to your needs, of course, to the expectations of the media representatives because you've communicated it. And of course, our -- the expectations of our other stakeholders will also be delivered. So this is a more extensive view as my colleague, Filip Osadczuk has said. This is important to us because since this is the energy group -- Polish energy group, plays a very important role in our society. And this role goes definitely beyond strictly financial dimension. So we included many aspects in our report. Not just business-related operations. And now moving on to the results after the first 6 months because this is why we meet today. Well, I'd like to share a very good news because in H1, we had a record high EBITDA. So the -- since I've started running or heading the PGE, we've started implementing new actions, and this is actually the result of it. And of course, there are also one-off events that affect the EBITDA, but we will talk about it later on. In my part, I would like to focus on operations and strategic actions. In October, it will be 1 year since we published our new strategy. We know how much work is still ahead of us. And the investment process in the energy sector takes years. The effects are not immediate, but we are satisfied to say how much we already achieved implementing the strategy, which last year assumed real shape. And it is still being operationalized and consistently implemented, which, of course, brings the measurable results that we are communicating officially. Our key investment project are offshore wind farms and in this half year, we implemented Ørsted transaction. We received the decision of the Ørsted President for Baltica wind farm and we are before the notification of the commission. We are also finalizing the applications for new locations, which we already communicated as the company. This is naturally, it's 6.5 gigawatts in our strategy and so far, we have 2.5 gigawatts, 1 more gigawatt that will probably be implemented by ourselves, but we do not preclude cooperation with a business partner. In our strategy, we have 6.5 gigawatt, and we want to implement our strategic assumption to produce 6.5 gigawatt from the wind farms. In August, we selected the financial advisor, Societe Generale, an experienced entity, as you know. Investments of this type, as experience shows, ours will be the biggest investment of this type globally. And such investments require comprehensive financing from many entities. A similar investment at the shore of Great Britain is financed by almost 30 entities from the entire world. The process is very complicated in data. But when we were choosing this partner, we were convinced that it's a professional advisor and that the process will be implemented soon and that financing will be unsure. Our partner is implementing investments on the balance and will be attracting financing from the outside, also using our own resources, but mainly this will be external financing. The next milestone in the implementation of our biggest project is the launch 2 weeks ago of the tender for wind turbines generator. A technical dialogue started with the potential providers. Of course, their number is very much limited as you will know well, but this works also already started. In parallel, we signed the letter of intent with Tauron and ENEA in the field of our offshore wind farms and also in the area of educating the future staff for the operation of offshore wind farms. And a sectoral agreement was signed for the development of offshore winter farms. This was a foundation for this sort of economy for PGE. We are in active dialogue with the potential contractors to involve as many as possible Polish enterprises in this process. A sectoral agreement is also to serve this purpose. It's about tightening the cooperation bonds. So this also is linked to our previous activity as a Polish energy group. We want to involve as many Polish enterprises as possible in the implementation of this future project. As regards renewable energy, we are implementing our actions in line with the plan of the group in June 2019. We won the auction for 1 megawatt. We are already building solar farms, that's 2 gigawatts. In July, we signed an agreement with [indiscernible] municipality, that's an investment up to 50 megawatt to be implemented by Solar One. And we are closely cooperating with local communities and local administration. This is also one of the main elements of our strategy, cooperation with local communities and local administration and joint implementation of the projects to improve the level of energy security. This is one of the element of energy transformation departing from fossil fuels. We are developing an energy storage program. We launched an energy storage facility on Mount Zar with a capacity of 500 kilowatt and the capacity of 750 kilowatt hours. We are also working on a storage facility in [ Jarnaw ]. That's a 200 megawatt, one of the biggest. Now this is implemented and it's -- we are now applying for a subsidy. And in total, in this huge program of energy storage implemented by the group because we announced a program for energy storage, and we plan to build up to 800 megawatt. Gas, recently very present in the media. We've been talking about this for years, stable gas capacities. So that is what is needed. Renewable energy, of course, also needs gas capacity. So we've been talking about this for long. So we are implementing to gas steam blocks in Dolna Odra plant -- gas-fired plant with the capacity of -- there was also an advancement of the project, exceeded 40%, and we hope it will continue this way and we will have an opening, several money for the investment I would like to invite the representatives of the media. Last year, we opened the tender for the general contractor in Rybnik fired plant. So all these will feed the country's general energy system by over -- by 2,200 megawatts. So these are big investments. And apart from the investments in Dolna Odra gas-fired plant and Rybnik gas-fired plant, the group has a program of switching the heat generation to gas. This is also implemented, and we are preparing documentation to be able to implement these investments. The most advanced one is in Kielce. We are consistently implementing the policy, which PGE heat Energetyczna is implementing on our behalf. The entire gas program, switching from coal-to-gas is implemented consistently. Consolidation of district heating PGE ensures stable deliveries of heat. We are the biggest producer in Poland. I'd like to comment on the recent comments regarding our takeover of the assets -- heat assets. This is great business for us because this group of companies actually, there has already been returned. We planned PLN 1 billion of EBITDA. For -- in the first half year, it was over PLN 700 million. We still have autumn and winter ahead, and we plan it's going to be PLN 1 billion. We assume it's going to be PLN 1 billion. So we bought the assets for 3.5% EBITDA. And I wish that PGE could repeat this success, some acquisition like that because now it's impossible to buy any assets on the market -- any assets with such an indicator. And of course, we have successfully implemented the consolidation. So EMF the former heating group and Rybnik has been integrated with our company and they work according to the schedule and the return on investment is very good, I'd like to emphasize that. In addition, the stability of a big energy group, the biggest energy group in Poland for local communities is very important. And in the dialogue with the heads of the cities and towns where we operate, we hear that people are very happy to cooperate with PGE, that this is a stable and responsible partner. And we are very happy to hear that. We are happy that this is how we are perceived because this is one of the important aspects of our operations. And now regarding the transaction that we've been talking about because our analysts and journalists reminded us that this change was a big change or maybe not so attractive for us. And the indicator was such to be a 4.5% of EBITDA. But the overtake of the assets helped us to get additional permits. So over -- so in fact, the cost was around PLN 3 billion. So that helped us to build a position of leader of Polish heating. And although I am -- I acknowledge the scale of challenges in the transformation of heating, we just said about the gas transformation, but also the development, we have to remember about that. And with the support of many mechanisms for cogenerations dedicated to cogenerations, well, this development, this growth will be continued and even deepened. Moreover, switching into gas, it's also prepared in Gdynia heat and electricity plant. Krakow [indiscernible], this is what we know of. So most probably, surely, or finally, we can talk about outlays or decarbonization of heating will receive around PLN 9 billion. This will be the out -- this will be spending for CapEx. And now talking about the challenges of 2021. We have to remember about July '21 and agreement on cooperation in the separation of coal assets under integration with the National Agency for Energy Security. And this is often mentioned by you, by the representatives of media and by our shareholders as well. So I'd like to emphasize and repeat that the process has continued according to plan. So there are no threats here. And other issues connected with coal assets include the agreement with PGG Polish Mining group. This is something interesting to you. And this is our partner as you know, for many years, although this name is relatively new. And we had many agreements with PGG, guaranteeing of price stability and hard coal supplies. We don't see any threats here. This is very important in the context of prices of the fuels that, in recent weeks, have been going up, record high prices. This is what we are seeing in recent weeks. And this is good for us that we ensure deliveries of hard coal at attractive prices. Now I would also like to go back to the subject of tour-of-mine because it's a very hot subject right now. And I'd like to say that we are negotiating with the government. We will be providing service, expert reports necessary for our negotiations with the Czech partner. We also focused on the communication on explaining what is the situation in this region to the citizens and how important is Turow for the energy security of Poland. I'd like to remind you that in this region of Poland, Turow guarantees energy security, but not only because at the time when we had shortages of electricity in the European Union, well, this energy was sent -- transferred to Slovakia. It was produced there and in other countries. So Turow plays a very important role in Polish electro energy system, but also it is an important place for the EU energy security. We created a space for dialogue at the Polish, Czech and German border. We organized Polish and Czech forum in [ Car Patra ]. We are also continuing dialogue with the local communities, local partners, they want also -- Czech side wants this negotiations to be wrapped up as soon as possible. But the cooperation in this region is very tight. It's very close. And this case is quite problematic from the perspective of our good cooperation in this region. So I also wanted to share with you a new completely -- piece of new information that will be communicated as the PGE, Polish Energy Group, which is the brand strategy. We are the first company in Poland and one of the first in Central and Eastern Europe, a company that's dedicated to green energy. We are one of the biggest producer of renewable energy in Poland, and this strategy is quite -- is very consequent. And so we want to be as friendly to environment as possible. And since we are, then we would also like to change our brand because this is what we've been focusing on for quite some time. We want to share knowledge, expertise and support with our customer and drive the change. This is our motto. Motto is we live in green change. So this will be the motto sent to our clients under our campaign. On the 1st of October, we launched a media campaign presenting a new and very attractive PGE brand strategy and strategic direction for development growth of the company. And now regarding the strictly economic results -- well, that's all from me. And now I'd like to ask Lechoslaw Rojewski to present you financial results, and then we will go on to the Q&A session. And of course, as usual, we are very open to the dialogue with the representatives of media and our shareholders.

[Interpreted] Ladies and gentlemen, now let me tell you very shortly. Well, all right. Now let's go back to our subjects. Before we move on to financial results of our group, let me picture the situation on the electricity market in 2021, which is connected with, first and foremost, the second quarter of this year. And the second quarter of this year, as you know very well, came with a big growth of GDP as compared to the first quarter, 11% -- up by 11%, which translate on to the growth of electricity and production and demand, consumption of electricity. Now talking about the consumption. Well, this growing consumption generated growth by 4.0 terawatt hours. So this is around 11% more than a year before. Also, the impact on the growth of production of electricity, this was also due to the positive energy import-export balance. There was a drop by 2.6 terawatt hour, lower net import. That was mainly due to the fact that electricity production competitiveness grew in Poland. The prices of fuels on international markets were high. And on the other hand, there was a relatively low level of wins in the entire Europe. This trend has been maintained. And this allows us to conclude that in the coming quarter, we will also be recording growing exports of electricity as compared to imports. So the balance is better for us. As regards the current financial results, of course, the financial results are determined by the situation on electricity markets that we were observing in 2020. And in the base contract with delivery for '21, there was a drop by PLN 34 per megawatt hour, which kept the level of prices at PLN 232 per megawatt hours. The prices of permits, which are determinant of prices on the wholesale market, in this period, remained stable, which can be translated on a lower margin to be implemented from conventional assets. However, this drop was partially compensated for by the power market, which started functioning in 2021. The current situation -- maybe let's get back to the previous slide, the current situation as regards the future with delivery in 2021 is mainly determined, like I said, by the rapid growth of prices for CO2 permits. You know well that this growth in comparison to 2020 was really rapid because from 44 it grew to 65 or 66, depending when we check. The average price of future with delivery in 2022 was PLN 322 per megawatt hour and this is a growth by PLN 90. So like I already highlighted the main element, which affects the growing prices of electricity are the costs connected with the purchase of CO2 permits and this growth in spite of the growth of electricity prices affects the margins. In particular, we are seeing this in the conventional assets segment, where the main resource used is lignite, characterized by high efficiency. Now we can continue with the next slide. In this slide, you can see the particular segments and the results in the conventional energy sector production grew by 2.6 terawatt against the respective period. Last year, we recorded major growth on the production of energy from coal by 25% and from lignite. It needs to be emphasized that production growth was affected by the launch of a new block in Turow plant. This led to the production of 0.5 terawatt hour of electricity. As regards production of electricity from renewable sources, we recorded stable level year-on-year. In the first quarter, the weather conditions -- due to the weather condition, they were not favorable for the production of energy from wind farms. The symptom that shows that we maintained a stable level year-to-year was the introduction of new wind farms. We can say -- we could say -- we could mention the farms that we both launched and the ones that we acquired as well. Also, when we look at distribution due to the growth in the volume of distributed energy, there was 1.0 terawatt hour growth against the respective period previous year, which was connected with higher demand. When we look at the sales of electricity, there has been a drop. It is down by 0.3%. This was due to smaller demand for the, a, tariff and to smaller demand among the biggest clients that buy wholesale amounts, while at the level of households, the level that we distributed was actually similar. As regards the heat sector -- the heat sales, there is a clear growth here, clear growth of heat demand. The demand grew by 1.2 petajoules and this was connected with the weather condition present in the given period. Here, you can see the main factors of EBITDA development and comparison of the second quarter 2020 and second quarter '21. And of course, we are proud to say that the EBITDA grew. This EBITDA was around PLN 2.1 billion, around PLN 700 million more than last year. As regards the reported EBITDA, reported EBITDA of PLN 3 billion and this first of all is due to the overestimation of recultivation reserve. Let me mention that we changed the approach to overestimation of recultivation reserve due to the change of interest rates on the market, especially interest rates for the bonds 10, 20 and 30 years bonds and in the second and third case, this was forecasted based on synthetic estimation of the values. So the result PLN 3 billion was 3x higher against last year. And those results are, first and foremost, connected with the fact that we've delivered a very high operational result. You will see it on the next slide. Although as you can see here, the margin on electricity and heat is negative in -- but a high-volume of production that was worked out during the past quarter, achieving PLN 793 million against last year, resulted in this margin. a positive effect was compensated by the -- or offset by the negative effect on the price of electricity because it is dropping by PLN 38 on -- per terawatt hour. What was the result of that? Well, basically, we had the base from the last year. And as a result of COVID, that determined those factors resulted in the lower demand for electricity in 2020. Now talking about the CO2 emission costs. You can see on this slide that they grew by PLN 565 million with the volume emissions growing and with translating this into unit price PLN 2 per ton. And under this position, we also presented the effect connected with the shortage of the result of the further sale of CO2 permits, because last year we received the permits for CO2 and we are talking about around minus PLN 268 million, and this is about Opole power plant 5.6. Now the margin on electricity and heat production went down by PLN 400 million. As you can see here, this is PLN 485 million, which was offset by the revenues from the power market. Now well, under this Q -- quarter, the revenues were PLN 671 million, which helped us to continue positive sales effect well. And retail sales grew by nearly PLN 400 million, and the unit margin grew definitely, which offset the drop of sales volume. And the distribution margin was delivered as higher by PLN 126 million. And here the demand also grew, which was connected with the economy bouncing back during the second quarter. And the demand of end users was around 12% higher. Now let's summarizing -- the summary of H1 '21, the financial results. If we skip the mentioned one-off effects connected with the changes on the recultivation reserve, well, the repeatable EBITDA was higher by PLN 1.173 billion. During the second quarter -- let's move further, in the second quarter of 2021, the CapEx was PLN 1.2 billion and were comparable to the last year same period. And as President Dabrowski has mentioned that though the CapEx was spent mostly on low carbon units in Dolna Odra power plant, it was around PLN 326 million recently despite that in distribution, we noticed that the CapEx is going down in the presented period, we have to emphasize that this is just a temporary effect because the distribution in the new quarters is dynamizing the investment-related operations, and spendings -- and the spendings, yes. Now looking at the debt -- net debt. Now this drop of net debt is the result of a very high cash flow on operations -- operational activities, mostly because we did not spend money on the CO2 permits, which were guaranteed with the help of the futures. And we can say that the drop of this net debt was mostly due to the payment of 50% of shares in EBW 1 and 2 and 3. And now summarizing all our segments. Well, we have to say this, according to the current estimates and good results delivered by the conventional electricity, the current market situation helps us to say that by the end of the year -- until the end of the year, the situation will continue to be stable and there should not be any significant factors that will affect the year-on-year result. Now talking about the heating, I have presented to you already that we've delivered very good results in the presented -- after -- during the presented quarter, and we believe that the results will be even better by the end of the year. Now renewable energy, taking into account the current prices of electricity on the spot market, as well as green certificates prices, as you well know that those green certificates reached the level of 150 and on average it was 9% higher than last year. Well, that also helps us to say that this year should be positive for renewables. Now in connection with the fact that the demand for electricity is growing, we should deliver better results in the distribution segment, they should be better -- the results should be better. But we have to emphasize one thing that because this is a regulated segment, the surplus of income that will be generated in connection with the fact that we have a new regulation about that, in 2023, the income will be smaller. In the end, well, the distribution practically delivered what was planned on the market this year, so we can only expect that the results will be better in this segment. Thank you so much, ladies and gentlemen.

Thank you very much for summarizing the first half year 2021. Now we pass on to the Q&A session. To start with, we'll go through some questions that we received online. And then I will hand over to you for your questions. [Interpreted] The first question. The company is recording good results and a positive outlook for the end of the year in practically all the segments. Can such results be repeated next year in 2022?

[Interpreted] We would like that very much for this to happen. But the market pressure is quite strong as you know. We'll do all we can to have the best possible results, but unfortunately not everything depends on us. We are doing our best to optimize the costs of our operations and -- to minimize the cost and to maximize the profits. And we are expecting next year a slightly worse situation. Lower production volumes in conventional energy are very real. We are -- we have a maximum production even beyond our plans, so that's why we have such good EBITDA. It was winter free summer as you know, and the result is that we work beyond the plan with all our machines. And the situation today is that energy on the wholesale market is lower than in Europe, and today we are an exporter, not an importer of energy that was like that in the previous years. If the situation changes our production will drop. Now we are working on the machines to the maximum, but this can change. As regards lignite production volumes build the margin of our operations and the revenues from the power market, which was mentioned will not cover all the costs next year. As regards heating with the construction of the tariff model, due to this construction, it will be hard to move the increase on CO2 to energy. We are working with the energy office to make this process smooth. And as regards distribution, we had a very positive contracting. We will see how it will look this year, but we are seeing very big changes on the market, and this is kind of a threat for energy balancing. The market is now, to some extent, terrified by the rapid fuel prices growth. So we are actively working on the market, but it is hard to predict how the market will look. And we need to remember that we are not just talking about retail, the G tariff, but also management of trade on the wholesale market. We are very active there, and we are responding to the changing prices on an ongoing basis. So to sum up, we would very much like the results to be as good as they are in the first half of this year. But this is going to be extremely difficult.

[Interpreted] Next question. Actually a series of questions about the process of separation of coal assets and NABE process. How is this proceeding? What are the risks? And what about the debt in the context of the social contract?

[Interpreted] If you allow me, I'll answer that. As regards the separation of the assets, I mentioned that before the project is progressing according to plan, and now we are at the stage of selecting advisors for all energy groups. As you will remember, there is -- we signed an agreement with the Polish Energy Group and Tauron in order to select advisors for this process. So this is progressing. The Ministry of State Assets started an intensive dialogue with the European Commission, a dialogue on this topic. And we assume that in this process soon the works of the advisors will start and the valuation of the assets. So probably, the process will be finalized next year and the final results will affect the sales price. But we assume that the debt will be assigned to the assets that will go to NABE.

[Interpreted] Next question. The way of presenting the debt changed due to which it is lower, why is that?

[Interpreted] Ladies and gentlemen, you need to remember that the debt, which at the end of the first quarter was at the level of -- at the level of PLN 9 billion, dropped to the level of PLN 8.71 billion. And this is not showing like -- this is not a misinterpretation. That's mainly because we decided to change the classification of the limited availability resources. So we -- as regards the limited availability resources, we just admit the resources that are on the account of clients of Polish Energy Group, the broker house that is security with -- of settlements. This way we can compare the debt of PGE with the covenant level, and this way we can have more room for obtaining debt instruments on the market.

Now I hand over to those present here. We have a mic. Piotr Dzieciolowski, Citibank.

[Interpreted] I have a question about NABE. Which element of the process requires notification to the European Commission, and how is this process going to progress? So what requires certification to transfer or the valuation? And the second question, how do you perceive the valuation because regarding the profitability of the assets it will drop in '25 because the capacity is ending in 4 years. There is cash flow, there is different CapEx, and they stop making money. And there is a PLN 20 billion debt. So where does the positive valuation of the assets come? And what if the valuation is negative? Is there a possible scenario where PGE have a net settlement and takeover part of this debt?

So maybe over to Director to answer this one.

[Interpreted] Let me start that ladies and gentlemen the notifications will be supervising the whole concept, because it is connected with the mining transformation, the mining sector transformation. So the EU Commission asks a series of questions, and we are not the host of this process because the host here is the Ministry of State Assets. I don't know the details because this dialogue is -- the whole dialogue, all the outcomes will be agreed with the commission. As we've mentioned, the long business perspective for this kind of assets, well, we have certainty for 5 years. We have the capacity market for coal and then we shall see. It is under the negotiations with the European Commission, how that will work in the future. One thing is sure that Poland has -- must have a sovereign power market, electricity market. We have to have power and electricity energy security. So if -- that the negotiations are continued, then I hope that this mechanism will be fully worked out how the future will work for those assets, because as we all sit here and listen to us, we have no doubt that within the next few years, we are unable to do this deep transformation as expected by the politicians from the EU, so that Poland actually closes down all the assets generating electricity within the few years. Well, that would make us a country about power generation and our economy competitiveness would be in threat, as well as the sovereignty of independence of our country would be a threat here. So we hope that the European Commission will understand our position. Even Commissioner Timmermans speaks more positively recently. Well, it seems that he understands the specific situation in Poland. Well, it is quite unique, and now when it comes to also heat, we are quite unique country hit for 55 that actually supports for gas and new investment. So this is very important if we want to transfer on to a low carbon fuels such as gas. We definitely need to support our gas resources because in big cities, we cannot just transfer onto renewables. It is impossible. So those expectations that it can be done within 2 or 3 years are not possible. Well, we know that not everybody knows the unique situation in Poland. In Poland, well, the heat system is a very well developed, especially in big agglomerations. And I'm sure that the dialogue run by the Ministry of State Assets and European -- with European Commission will be finalized very soon. And then we are also taking -- talking about the dialogue with our social partners. This dialogue is as intensive, and I am very happy that after the initial shock -- when we as the PGE represented the transformation, the hard transformation project that there is no time to waste and we have to separate the assets and the response was quite nervous and emotional among some of the representatives of the social partners. And today after long days of discussions between us and social partners nobody doubts that energy transformation is necessary for Poland, and PGE continues its path in a good and the only possible direction. And of course, we have to remember that they are people, they are humans, and humans must feel secure in the future entity. So this dialogue is quite advanced. And diplomatically speaking, it is conducted continued in friendly atmosphere, on friendly basis. Let me tell you this that generally because we don't know the exact date when this process is launched, and it is not determined what will be the evaluation of assets, how the debt will be settled, so today we cannot give you a concrete response how this process will be implemented. So we cannot say how this will affect our financial report.

[Interpreted] No, I am not asking for concrete responses from you. Do you accept? I wasn't asking for concrete responses. So selling assets in Eastern Germany, the government paid additional EUR2 billion for the patent power. So will this also affect Polish situation similarly, so assets versus power plants?

[Interpreted] Well, the value is negative.

[Interpreted] Is this a reality -- realistic scenario? So how much that would -- maybe PLN 20 billion, PLN 10 billion, PLN 20 billion? Do you mean the whole debt assigned to the assets also from other groups?

[Interpreted] No, just the conventional energy sector, including reserves.

[Interpreted] So you have 6 million reserve, so plus 3 pensions reserve. So you also have cash flow of all assets for the future, for the 4 years when they make money, and it still does not cover the obligations that you have there. So is this possible scenario, because we are trying to understand each other. We don't have this kind of scenario, and we do not believe in this kind of scenario.

[Interpreted] Well, this situation is dynamic, but we do not believe this will happen.

[Interpreted] So you say that the whole debt of PLN 18 billion will be transferred from PGE?

[Interpreted] This is what we expected.

[Interpreted] Does this require notification from the commission as priced?

[Interpreted] No, I believe not. But definitely, it will require dialogues. And once we have the councilor appointed, and we believe that this councilor will support us in our dialogues with banks. Let me tell you this, that this transaction may not raise any doubt and concerns concerning capacities. Well, this valuation was based on the market roles.

[Interpreted] It's good that you said it, because please explain it to us because if we can see negative value and effectively, the PGE is capitalized directly.

[Interpreted] Well, we are not referring. We are not communicating one value of those assets. You have your assumptions, and I will not question that. Thank you so much. Are there any other questions in the room?

[Interpreted] [ Rafal ], High Voltage. I'd like to ask you about the capacity market. Are you planning to notify about anything? Are you going to bring anything for the certification for the auction? And the second question, this is about CO2, do I understand you correctly? Because in your report, you provided that the CO2 cost during H1, for conventional segment is PLN 111, with the cost for the whole market, PLN 198. And I understand that this difference is your pure profit that will not be visible in the coming quarters.

[Interpreted] Well, we contracted energy earlier, much earlier because we bought CO2 permits for EUR25, and we do not transfer that into cost. This is what we contracted. And well, this difference will be visible next year. Please note that last year, we had 3, and this year, we don't have it. So we have to remember about it. And now capacity market -- now, about the capacity market and the question. At this moment of time, we would not like to answer that. But in your report, we will be notifying our units.

[Interpreted] But I am talking about the new ones because in your report, you mentioned revenue, did it receive the connection conditions?

[Interpreted] You are talking about gas?

[Interpreted]. Yes. I'm talking about gas.

[Interpreted] We are now in dialogue with the system, we have not received the conditions for the connection, but we are in dialogue with them. Well, the gas system, the decision has been taken, but the conditions have not been set forward.

[Interpreted] But you are not notifying those conditions for the capacity market?

[Interpreted] Yes, we will notify them when the moment comes. We believe that Rybnik will also be notified for the capacity market as other units.

[Interpreted] But will it happen this year?

[Interpreted] No.

[Interpreted] For '26?

[Interpreted] Yes, we take that into account notification for '26.

[Interpreted] Pawel Puchalski, Santander. Two questions. First question. PGE is the leader in many important segment. Recently, a lot is said about the nuclear SMR. So what is the PGE's opinion about that? And you also mentioned the challenges for the sales of sector, a moment ago, ENEA mentioned they wished for maybe 40% price increase. What about your approach to PGE or your PGS approach as SMRs?

[Interpreted] We are not thinking about investing in this sector. In this sector, we sold Energia [indiscernible] and now the nuclear project is conducted by the state and directly supervised by Prime Minister Morawiecki. So SMRs, this is definitely a thing with future, of the future. We are relying we have 2 feet firmly on the ground, and we are relying on the proven technologies. We have to think about security, about secure deliveries, the technologies that have been proven technologies. Although the experience shows that the change in costs can surprise us. But as regards SMRs, for now, we are not going to invest in this area. And as regards the tariffs, the tariffs that you mentioned, now we are analyzing all the costs and the economic environment. And in the right time, we'll submit the proposal to the President of the energy regulation office, and we will have a dialogue with the office. But currently, we are analyzing all the costs. When we have the conclusions ready, we will submit them, and you will be the first one to know, because this will be immediately communicated to the public. And today, we cannot say whether it will be 30% or 40% or 20%. Like I said, we are now analyzing the costs, and we will be submitting the relevant propositions.

[Interpreted] Barbara Oksinska, Business Insider. What about the price of coal? You mentioned the agreement with PGG that this price will be stable, we can see that it's already $200 per ton in European ports. This price that you mentioned, is it equipped with PGG or are there going to be negotiations? And I expect the price will rise also for PGE.

[Interpreted] We made an agreement for deliveries next year with Polska Grupa Gornicza, a Polish Mining Group. Of course, I can't disclose the details. This is a bilateral agreement, also favorable for both parties to the agreement, because every agreement is made by way of negotiations. So the price for us is stable, unfortunately.

[Interpreted] Is the volume similar as in the contract in 2017?

[Interpreted] Yes. PGG is our main supplier, and the situation hopefully will not change. We hope for our colleagues from PGG now, well, there is a coal boom, so we wish for them to meet the demand because the demand on the market is huge. Any other questions?

[Interpreted] [ Macher Martens ] with Bloomberg News. Maybe you could tell us whether the price of coal, was it 1-digit or 2-digit growth in comparison to this year. I assume there had to be some growth because the prices on the market are growing. And a question about PGG as such because at Tauron, there was this memorandum; memorandum between the state treasury and Tauron, and they will be debating whether the government buys Tauron [indiscernible]. And what about your prices from PGG in the context of NABE? Is it going to happen in parallel or before, because you will not be the owner of PGG at some point.

[Interpreted] Now we are about the future. This is not the topic for now. We have a stable contract with a secure price. I cannot disclose the details of this agreement. And this is confidential between us and PGG. I can only assure you that these are good prices. This, of course, affects our results.

[Interpreted] A follow-up question about distribution. You mentioned, I don't know if I understood it, I don't know what word you used, that some of the revenues, regulation accounted some of the revenues from the higher volume than forecast will be taken away from the company. So what are these values this year? And the regulated system was extended, and then there was to be a new regulatory setup. I wanted to ask where is it, where it can land in the years to come. So 2 combined questions about distribution.

[Interpreted] So the regulatory account, like we mentioned and you rightly observed the excess volume to the tariff for '21. After closing the year verification of the volumes and confirmation of the final volume, this surplus will correct the tariff for '23. There is this year difference because we want to have the full knowledge about the volume and what part is the surplus part. Of course, if the volume of '21 is higher than the one in the tariff in '23, we will diminish the value, the regulated revenue that we'll be applying for in '23. And as regards to tariff model, theoretically, there should be a new one starting in 2022. So far, it hasn't been settled. The analysis are underway, talks are underway. We are expecting that for development investments, mainly network investments, there is a possibility to add some percentage points to the average for the segment. This is necessary to encourage us to invest in distribution. But this is also understood by the President of the Energy Regulation office. So now there is a dialogue with the President about the future, about [indiscernible] and return on investment in distribution. And we don't want it to land. We want it to take off. And probably, it will be like that because distribution and expenditures on distribution. Distribution will be the main pillar of our operations before we finalized the offshore farms projects. So investing in distribution is necessary in Poland, modernization of distribution. And especially important, after the separation of the assets. So we assume that the President of the energy regulation office will encourage this.

[Interpreted] Can you give me the figure, how much were the revenues in the first half of the year against the planned volume? And was it like that in the previous years, because it seems to me it was like that, like several hundred million. What was the true profitability of the investment assets? Maybe you could say that it was 5% higher volume every year or 3% higher.

[Interpreted] It's hard to comment on the exact values, because they are really relevant. History is history, and we are not going to return to that. The open case is '21. The volume is slightly higher. It wasn't fully known how the economy would work after COVID. But like it was said, we'll be talking to the regulator.

[Interpreted] Let me explain why do I ask about it in -- about the details, because we have financial models to calculate. And well, this performance will affect the -- this will be not just 3% more, whether -- we need to know whether this business makes X or Y. This should not be a secret, but then thank you, if you don't want to answer this. Thank you so much. The last question, I have the question about PGG. This date is 2023. Is it the end of 2023 or the end of 2020?

[Interpreted] Well, it goes through 2020, because the report will be for 2023. So in 2023, this agreement will not be enforced. Well, this is a short-term agreement. Well, the agreement is long term, well, the price has been fixed until the end of 2023. But cooperation agreement is a long-term agreement, 5 years long.

[Interpreted] But by 2022, I believe you will have no coal assets.

[Interpreted] Well, the new one will have to worry, but we still had no coal contracts because the previous owners made it. So this PGE, well, so I was the first president of the company, and I had no contracts. So we don't want to make it for the next owner, be for [indiscernible] which was supposed to be the next entity. So we don't want to make another entity without coal. That's why we signed long-term contract. And they will be transferred in the future for the new owner.

[Interpreted] Now about the councilors of this process. I understand that you've chosen the same councilor advisor.

[Interpreted] Well, he has not been appointed by the premises, but it will be a joint advisor for one group of advisors for all 3, 4 companies plus Energa.

[Interpreted] But Energa has not been included.

[Interpreted] Yes, it has been included. [indiscernible] as well. And the interest of all companies are not in sync because everybody would like to get something, but there is one pool of money, and it will not be increased. And understanding of the Ministry of State Assets is coordinating the process. And it has been understood that the transformation is necessary. And during the process, we definitely will have some friction between the entities. But definitely, we are all following the same direction, which will be the future energy security for Poland. Well, this is the idea that we have on everyday basis. And we want to play this role as members of the management board. And this is what we've been obliged to do so to ensure the energy security of Poland. So we do not believe that there will be any big frictions to disturb the whole process from the inside. And the Ministry of State Assets is coordinating for it. Jacek Sasin, the minister who I value very much, and he is the host of this process. And I am sure that this process will be effective.

[Interpreted] And in the negotiations with the European commissions are going slow and you're unable to do it in 2022? Do you have any alternative variant such as German variances?

[Interpreted] So releasing distribution and renewable resources on to the stock exchange. There are different scenarios possible here. This scenario that we are implementing right now has been outlined by the Ministry of State Assets as well as representatives of other ministries. So implementation of NABE. Well, this scenario that you present is possible, but we do not have it as an objective.

[Interpreted] Well, the distribution could win a lot when placed on the stock exchange.

[Interpreted] Well, it could be successful for those ventures. But today, we are not focusing on this process. Thank you so much. If you allow me, let's wrap up today's conference. Of course, there are questions -- online questions that we were not able to answer, but we will individually answer them. I'd like to thank you today. Thank you for your attention, and let's see each other in November. Goodbye.

Thank you. Thank you for this meeting, especially you who came here to the room to see us personally. And I'd like to guarantee everyone that we will continue the plan that we have and consequently implement our strategy and also our shareholders will be -- to make our shareholders happy, and to make our investments profitable. Thank you so much. [Portions of this transcript that are marked [Interpreted] were spoken by an interpreter present on the live call.]