PGE Polska Grupa Energetyczna S.A. (PGPKY) Q2 FY2025 Earnings Call Transcript & Summary

Good morning. Welcome to the press conference concerning the financial and operational results of PGE in the second quarter of 2025. Welcome to the audience of our room here and press agency and people who are online. We will have the Deputy President for Operations, Mr. Maciej Górski; the Deputy President and CFO, Mr. Przemyslaw Jastrzebski; and we will have the Financial Director, Mr. Piotr Sudol. I will have the pleasure to moderate the conference. My name is Konrad Mroz. Traditionally, as you might recall, we will start with the presentation. And in the second half of our conference, we will ask you. We will give the floor to you to ask questions. Now Maciej Górski, over to you, sir.

Good morning. Welcome. It is a small room, but I think it's nice to communicate when I have the mic on. How do we switch the slides? Let's move on perhaps to the next one very briefly. It is a great pleasure for me to present to you the review of what has been happening in quarter 2, 2025. But also what's even more interesting is what happened afterwards, the balance sheet date and a short comment on what's going to happen and which way forward as regards our strategy. The EBITDA in quarter 2 of 2025 was PLN 3.3 billion. It's a good result, 28% above last year's result. But what I think is even better news is that we are effectively performing with our investment program. The investment outlay in quarter 2, 2025 is a very similar number PLN 3.2 billion. That's CapEx, and that's also an increase vis-a-vis last year by a quarter. And I think more will be said about this in the later part of our presentation. But I do think that, as a matter of fact, the level of CapEx here is possibly one of the most important parameters that we are trying to communicate to you about, explain, present, but also internally in the capital group, we're trying to monitor it. There are some slight changes as regards to the main operational parameters, electricity generation and heat sales, and that's respectively, 11.43 terawatt hour. That's 1.5 terawatt hour less than the parallel period of last year. Now heat sales, we have a slight increase here year-by-year, and I will tell you where it came from, mostly weather. And now what has happened in the topic of our participation in the power market, capacity market. This is an unprecedented year in the history of the power and the capacity market in Poland because we have a lot -- exceptionally many auctions. And the year that we're reporting for, there were 2, and there was a supplementary auction for the second half of 2025, a catch-up auction where we contracted -- the supplementary auction is where we contracted 2.2 gigawatts in coal assets and about 100 megawatts in other assets, and that's good news. And then another catch-up was the first of this kind in history where mid-year, there was an auction that supplemented whatever had been auctioned in the December auction, and we managed to contract a few of our assets over 100 megawatts in total. And something that has been news to you for the second quarter of 2025, that's our capital strategy up to 2035. And as you probably know, we have planned significant investment outlays, PLN 235 billion. So that's cumulative CapEx until 2035, which is meant to result in our EBITDA growing up to PLN 30 billion a year. And I think that this strategy was of a well-balanced document and we represented our ambitions there concerning the development of new business lines where this was the outcome of many months of talks with our stakeholders. On the one hand, Polish electro-energy network and institutions -- financial institutions on the other side, but also we try to reflect our view on the world on the changing paradigm of the electricity and energy in the world. You might recall that our strategy was based on a few pillars. But the main message there, and I think that this morning displays that very well is that, unfortunately, the issues of security are becoming ever so much more important. And in our understanding, this is the security of our infrastructure of electricity supply. So the energy security is extremely important, and we put a lot of emphasis on it. Hence, the planned CapEx on distribution infrastructure development, which, as a matter of fact, guarantees access to electricity and whose effective development, improving the flexibility of the electricity and energy sector functioning and operation is key. This is a message in our strategy, and this will be the main area where we will be spending money, PLN 75 billion out of the PLN 235 billion is to be earmarked towards the development of distribution area, which we think is a responsible attitude to what's happening today and the geopolitical situation in the country, but it's also a response to the capabilities that we have in the distribution segment. We have, of course, been displaying quite a significant EBITDA in this area, but we've also been clear about the fact that we have some commitments towards the energy regulatory authority, and we try to implement the investment program in as much as possible and our ambitions are growing. Now regarding the issues of growing renewables, we have demonstrated our ambitions for wind offshore energy, but also land wind energy, and there's quite a significant level of investment, PLN 235 billion. So offshore wind and renewable account for PLN 85 billion. And we believe that we have managed to keep a rational balance where the initial assumption concerning coal assets was quite specific, and I will be going back to that later. Now briefly about what's happening on the electricity market at home. Slightly smaller use in the second quarter compared to the previous year, 3% less -- minus 3%, 1.2 and the electricity generation, a decrease of 1.7% and the balance of foreign exchange, that's an increase of 0.52 terawatts hour. In the first quarter, as you can recall, we saw a situation where there was some -- there was low production from renewables, especially wind, not just in Poland, but in Western Europe as well. And that meant that the -- there was a negative balance of the transboundary exchange and our coal assets at the time were more intensely used as a consequence. In second quarter, however, the situation stabilized somewhat. And in terms of prices, you can see here the pricing is quite stable. As regards to the prices that we saw in the second quarter, -- now we see a decrease by PLN 115 per megawatt hour compared to the first quarter. That is, on the one hand, the result of a reduction in demand, which is a typical phenomenon after winter and an increase in generation from renewable energy sources, even though May was not sunny. That was quite a surprise to us. But in principle, we saw an increase in generation from renewable energy sources. As for weather, these weather conditions have a major impact on how much we generate and what prices we obtain from the energy generated. And here, we saw untypically low temperatures in June. This, combined with high generation from wind resulted in rather typical pricing levels. I'm looking at my notes, and I see that the things that are worth highlighting and that probably are beneficial to us as of now is that we are now evaluating our competencies in participation of balancing capacity market positively. Based on how well we heard after June, we see that now we operate in increasing volatility in the market, in particular, in the balancing market. Also in the context of volatility after we exceeded to the PICASSO platform, you probably wrote about this, and we heard reports of record low prices at the balancing market, even at 34,000 per megawatt hour. That shows how sensitive the energy market has become. And incorrect balancing within just a quarter of an hour can cancel financial results developed over a longer period. And that is what we see in our trading activity. In the following slide, you will see a very brief outline of how it translated into our operating results. Decrease in generation by 1.48 terawatt hour compared to the same period last year, mainly as a result from lignite and coal fueled power plants generation. And also Gryfino Dolna Odra, our greatest gas fueled unit contributed to that. As for distribution of electricity, a decrease in demand in the tariff of small- and medium-sized enterprises is mitigated by greater demand in households, large enterprises, and railway electricity. As for sales to end users, we have the same reasons for the results, as mentioned before, 0.19 terawatt hour decrease in demand and the temperatures on average, 2 degrees centigrade difference resulted in greater sales of energy. In the following slide, you will see brief information about our key investment projects. As I have already signaled, these projects include the ones that are underway and the ones that are in the pipeline. I would like to talk you through those projects in as much detail as possible because as already mentioned in our strategy, we presented our view of investments in all segments that we see as promising great development. And for example, we have gas-fired generation in Rybnik of almost 900-megawatt capacity. Here, we are on schedule and on plan. Steam turbine has been delivered to the site. We see full mobilization on the side of consortium of Polimex. And we expect that next year, as planned, the facility will be completed. Other two installations in open-ended combustion cycle in Rybnik and Gryfino with a capacity of about 600 megawatts each. We have announced tenders and these are conditional on obtaining some form of support, in particular, in the form of power support contract. And we are getting ready for the upcoming main auction. As for renewables and energy storage, as you might recall, two major pillars of our strategy are shown in under the same heading. But in our strategy, we see them as two separate areas. Key projects here include Baltica 2. That's a project that's on schedule. And we already see some tangible effects of the work done by the contractors. You can go to the sea side and see the transformer station being built, the excavation work under the beach and those elements of works are moving on as planned. What is less visible, but also moving forward as planned is the preparation of seabed. Here, everything is on schedule as well. That's a complex, complicated project, but we are happy. It's being carried out in a very efficient manner and in good cooperation with our partner, Orsted. Large-scale energy storage is as new to us as those offshore wind farms. Here in Zarnowiec, we are planning to start the official construction there. This is going to be a landmark project in the development of our energy storage assets for chemical assets. Also, we announced a tender for construction of an energy storage facility in Gryfino. That's a huge scale, 800-megawatt hours on 400-megawatt connection. We hope to obtain the first bids within the next 4 weeks. Here, we have high expectations, high demand. We exclude suppliers from third countries. We have a policy of energy security management, and we are very disciplined in carrying out those projects. We intend to operate these assets. They are important to us. So we set the bar very high in how we go about implementing those projects. A lot is happening with regard to heating. There are not many large or spectacular investments here. One that was recently handed over for use was Czechnica with a capacity of 179 megawatt hours in heat and 315 thermic megawatt hours. That was the largest project, slightly smaller one, but equally interesting, was about 5 gas engines with a total capacity of 50-megawatt hours in Bydgoszcz, also handed over recently, and Kraków, where we concluded a contract with the general contractor for completion of 250-megawatt gas engines, and we obtained cogeneration premium in all those projects. There are a few other important projects in district heating. And there might be some questions or emotions around the Gryfino project. We also concluded a contract with the general contractor to construct a new heat source, and it will be performed according to the timetable that will enable the heat to be delivered to our customers, hopefully in August next year. So those are very ambitious deadlines, but this is not a very large unit. So I believe there should not be any problems with the timetable of this project. And the distribution, well, spectacular projects include areas of ICT or remote reading meters. And these are small investments, a few hundred million is the most -- the biggest. But in the area of distribution, we are quite disciplined when it comes to the implementation of our investment programs. And we are successful in doing so. And I think that actually, the clearly defined need to develop our distribution network in the context of connecting new renewable sources, but also connecting new recipients and making the grid more flexible, the network more flexible. I think that this bodes in very well with the changing landscape of the Polish energy and electricity market. But we view it through our lens, the energy security lens. We are responsible and accountable because our network is largely located in Eastern Poland. And fortunately, that's where we have the biggest exposure when it comes to the risk of some hostilities or something that some events happening like the ones that we have experienced last night. So distribution generates a big EBITDA, and it is important, but it's not the apple of our eye because it is the area that we have to devote a lot of time to due to the fact that it's necessary to ensure its security for our infrastructure security and for the security of our clients. And in all the investment projects that we have, and I think it's worth noting, we have mentioned -- I have mentioned the qualifying suppliers from the point of view of security, but what's really important and what we also emphasize on the level of our strategy is the issue of local content. And I think we largely try whenever possible to make sure that there is as high as possible share of Polish suppliers, and these are Polish suppliers, for example, from Rybnik. We have Polimex -- in Baltica, we have Polimex as well. The drill between the sea and land also is being performed by a Polish company called Janicki. Now in Zarnowiec as well. LG has Polish subcontractors working for us. In Czechnica and Bydgoszcz, we also have Polimex. So on smaller projects, for example, EC. In Gryfino, we have Ervigo. So there are quite a lot of Polish companies. This is particularly well seen in distribution because the share of the Polish content is very high there, and we are glad to see it. We make all the possible efforts to find the right balance between the share of Polish suppliers, contractors, and promoting the CapEx here in the Polish economy. But on the other hand, we also try to make sure that the solutions that are insured are top of the art and modern, and this is a success. We've managed to do it. And I think it's one of the areas where we are accountable. And I being accountable for the area of investment, I'm particularly happy to see that the local content is successfully being integrated in our DNA of the PGE Capital Group. And of course, we do have the strategy to lead us forward up to 2035. But on the other hand, we are all bearing in mind that such measures should be taken up and that we should navigate our investment process in such a way so as to make it possible for Polish companies to participate. Now the last slide from my part of the presentation, and I will be wrapping up. This is the completion of the coal asset carve-out team. We've all been waiting for this report that was tabled in early July. It had been prepared by the team appointed by the Minister of Financial Assets, and we really did expect the content to be as it was. It so happened that we wanted to publish our strategy regardless of whether or not the report was going to be published and when it was going to be published. However, our assumptions in the strategy were confirmed in this report. There is no justification to create NABE in the shape as it was suggested by the previous government. That's number one. Second finding is that it is necessary to define the need to develop support mechanisms independently of already existing solutions. And we are also in agreement with this conclusion. There is an optimum set of coordinated measures. They are here called the Decarbonization Mechanism, the capacity market, and the Non-Fossil Flexibility mechanism. And I think after putting more detail to these solutions, it will be the good way forward to further support investment programs, especially our investment program in the units that will be operating beyond 2030, assuming that the capacity market entails these units that will be performing up to 2030. So we are quite interested in seeing where these solutions will be going and what kind of mechanisms will ultimately be created and how they will be created. And of course, there is the issue regarding the Transformation of the Electricity System. One of the pillars of our strategy that we presented was the responsible transformation, the location, energy needs to transform as a sector. And since we are an important actor on this energy scene in the energy coal generation and lignite energy generation, we are very much interested in seeing the transformation being performed in a responsible way. And we believe that this will be a big challenge. However, I think we're at a stage today where an increasing number of ideas are coming up as to how these assets will be transformed, what kind of activities we can run in our today's key points on the map for coal energy. And now that is it regarding the overview of the situation, key operational data and investment data. Now it is a pleasure for me to give the floor to Przemyslaw.

Hello. As it was mentioned earlier, we have quite good operational profit, but it is not quite as spectacular as it was in quarter 1, which was a winter quarter, but also additionally, it was quite specific because the production was quite low of renewables. We can see that in generation, where the result year-on-year improved by PLN 413 million. Previously, that was a much better result, over PLN 900 million. But then we experienced an increase in generation, while in the second quarter, we had pressure on curbing the production, the generation. We also had a positive contribution of lower costs of fuels at the level of about PLN 200 million. Then PLN 1.5 billion was the positive contribution of lower CO2 costs, but that was leveled off -- offset by prices. We have a change in megawatt hour and volume, 1.4 terawatt hour. We see a positive contribution of Gryfino Dolna Odra and of longer heating period revenues. That was a positive anomaly from the perspective of revenues. The heating season was probably the longest among those recorded. It ended sometime in mid-May, which helped very much in driving demand for heating. The result was also supported by capacity mechanisms. In the second quarter, we recorded a significant growth by [ PLN 215 million ] up. But also, there was some distortion to the base as the market of balancing power started in mid-June. So that was the last quarter in which the statistical base was distorted. As for sales of electricity to end users, we recorded a growth, but it should be noted that to a large extent, this was also linked to covering the costs that we had to bear as a result of lower tariff costs of public consultations and also greater employment in offshore energy, renewables and gas energy, greater employment as a consequence of development of those segments. We also dissolved the provision on contracts related to the G tariff, but the scale of that was lower than in the comparable quarter of the previous year, which had a negative contribution to EBITDA. We saw, on the other hand, positive results on investments. In PGE distribution and railway energy, we had a positive impact of PLN 57 million and PLN 32 million, respectively. In this slide, you can see an overview of our CapEx in the second quarter. Until now, we have only shown the cash perspective. But here, we also show the presentation by type of cost. And the differences were even up to PLN 800 million resulting from the schedule of payments made by the group. These payments took place in July and August. For example, payments for the project in Baltica 2 amounting to over PLN 700 million is just one of the events of this type. Increase in cash was recorded in gas energy by about 120% as a result of Rybnik power plant construction in renewables, Baltica 2, then deferment to the third quarter, that was about delivery of foundations for turbines and construction of sea transformer stations. Decrease in distribution expenses over PLN 300 million down. That is the result of connecting new users in the second quarter. In railway energy, we had a decrease in expenditures. And this mainly concerned MOSA supply system and also a lower level of connection of new users. In heating, we saw a decrease as compared to the second quarter 2024. That was the result of major investment on the Bydgoszcz unit. Here, we completed an advanced phase of work involving delivery of main equipment to the construction site. The effect was partially offset by EC Czechnica, not fully though, and that's why the total result was negative. In coal energy, we revised our energy requirements. We reduce expenditures here to the levels that require stable operation of our units, but this is typical maintenance work. We are not considering any capital expenditures on increasing our capacity in this area. So to sum up, we spent slightly over PLN 260 million less than in the second quarter last year. But by type of expenditures, PLN 200,000 more investments. And we plan to maintain this direction in order to implement the strategy that was announced in June this year. As for debt, we extended our analytical activities. We believe that we need to show a broader context of debt because showing net debt only in a short-term perspective is misleading. The reported net debt was lower than last year when it was PLN 9.5 billion. This is, of course, developing towards a decrease of overall debt as a consequence of growing EBITDA. We paid taxes, so tax payments increased our debt. Additionally, we also had a new element, namely the loan from the recovery and resilience program. On the other hand, taking into account future payments for CO2, we saw a decrease here, but it was less than PLN 2 billion. Economic debt is PLN 14.5 billion. 1.07 is debt to recurring EBITDA ratio. However, it is very important to notice also the details, not just the general ratios. -- we expect that in the fourth quarter, net debt will amount to about PLN 11 billion. So you can see that in our case, the category of net debt is rather volatile, and it depends on terms of payment for CO2. Traditionally, at the end, our view of what is likely to happen still in 2025. We decided to introduce some changes in renewables. We expect greater results from balancing power market. These revenues will be supporting the coal segment and revenues that contracted from the supplementary auction will be important here, but we're not quite convinced as to it will be -- as to whether or not it will be possible to get a higher revenue from the balancing market. We expect the perspective to be rather stable, but the dialogue goes on for quarter 4. And until there is a final resolution here, we will still have some uncertainty as to what it will look like. Thank you. I think that will be all from me. And we move on traditionally to the Q&A session.

Thank you very much, gentlemen. Traditionally, Q&A, we start with questions that we have received before. Please prepare microphones for the audience here. Let me just read the questions that we have gathered first. First one is, what about the nuclear project? Is PGE continuing the talks? Or were they terminated as for the gas unit? Can we address this to Mr. Górski?

The talks are being held. The project for the company is still within our interest. This is due to the fact that, as we prepared in our strategy, we want to be involved in the location studies from the point of view of being able to implement a second nuclear power plant in Poland, but also from the point of view of potential locations for nuclear reactor modules. And well, in reference to the question about the gas unit, the gas steam unit that we spoke about last quarter, well, that's an interesting reference. However, those are two distinct projects, and it's a coincidence that the seller is potentially the same. But there is no analogy in terms of the talks held, but I can say as of today that we are sustaining our interest in having the 50% of the shares in PGE PAK EJ to buy them from ZE PAK SA. And we believe that we have a pretty good idea how to use the company, which already has location permit for the Konin surrounding area and it has performed a number of basic location studies for this Konin location, but it also has a well-educated and experienced staff, which is not common for nuclear energy in Poland. So we would be really willing to use the competence of that team to continue the work, the analytical work that we already perform in our location in Belchatów. We have completed the first stage of very basic studies from the point of view of excluding any potential seismic threats. And it looks as though we can proceed with the following stage to check whether there are any contraindications to still be considering the area of Belchatów for nuclear energy. And the second priority here would be to launch similar studies. For the Turów location, we want to locate an SMR there potentially in the future as we roll in our strategy and having a company in our portfolio that has tangible real experience in performing this stage and the subsequent stage for the analysis of drilling, I think that will be very useful for us. Thank you very much.

Second question is on write-offs. Why has PGE written off some of the coal assets? And is it a complete write-off?

Why? The reason why is it's a natural consequence of the market situation. And for the financial results of this area, and I don't think it should be a very big surprise for you on the market. But out of the 5 coal assets that we have, 4 have been written off completely. And I think the potential here for the future in this area is already limited. That's all I can say. But in very specific intervals, we are committed to justify the rationale between such tests, and it's very difficult to decide 100% or state that it is definitely the end of the coal area. It will all very much depend on the perspectives of the segment. But indeed, the massive write-offs here, I think something that's already -- we've turned the page on it.

Let me just perhaps add a response because it's been something that's been keeping us awake, well, the renewable energy and potentially keeping you awake. The last write-off also concerned our investments in wind -- PV and wind onshore. And I would leave that aside because immaterial, but the PV -- perhaps it wasn't material for the group. It was just over PLN 300 million. But compared to the value of the assets in the books before the write-off, well, that is perhaps a significant amount to look at because it was PLN 1.3 billion, but we've wrote off over PLN 300 million. So I think that, that slightly shows the discipline that we have in terms of investments. So today, we are witnessing some very deep transformations in the electricity market. Prices are not just prices that are -- the following the next day prices or potentially long-term contract-related prices such as PPA, but it is a realistic cost of balancing and profiling. And I think that we see that the market conditions are very demanding for PV, for solar energy. And I think that a year ago, when we met, I made a statement that was not forgotten saying that it is a misleading technology that solar panels were a misleading technology. I think back then, we were already aware that even though it looks nice and pleasant, a technology that you can freely adapt to any place in Poland. Already then, at the time, we started seriously thinking about revising our attitude to this ambitious investment plan that we had seen 3,000 megawatts in PV and solar. So this write-off really demonstrates that we are right, as a matter of fact, that solar investments should be even more disciplined than we would have thought back in the day. And the reality at hand today is that part of the products that were put in place, not just by us, it's not an exception, but big energy groups and some private investors just rolled out projects that were too expensive in solar energy and especially if they roll them out in the south facing technology, this profile is very exposed to negative pricing and potential limitations today. But we do think that this was possibly the only decision to take at that time, so we tested these assets against loss of value, and we were not sentimental about accepting these impairments. And this disciplines us and motivates us further to see that this interesting renewable source still requires an investment discipline and requires decisions that are based on rational evidence and allowing us to build value.

Thank you very much. A topic that already came up in what Mr. Górski was saying, the extra auction for the capacity market. Why did you not ask for extra capacity in spite of taking part in the auction? And what do you plan to offer in December?

If I look back, this extra auction was organized for a reason. We might recall that in the main auction, which took place in December 2024, NEA projects, in particular, did not get capacity contracts. Hence, a decision was made to organize this extra auction. that was a new phenomenon in the power landscape in Poland. While considering new gas fueled capacity in Poland, we took a short-term perspective, but we believe that the medium-term and long-term perspectives are more important. We were not prepared well enough to successfully win the power contract. But that was not the last auction nor was it the only one that offered support systems. So what we are doing right now is that we are being very disciplined. I will reiterate this word. We are disciplined in how we make any commitments at all because making a commitment in the power market is assuming a liability. Previously, we were not ready for that. As of now, after the small Gryfino, the 600-megawatt Gryfino was prepared after Dolna Odra new project was prepared in Ostrów Wielkopolski. These are the projects that we want to present in the next auction or upcoming auctions depending on how that is organized. It is not yet defined what will be offered in terms of support. But what we want to do is to be better prepared for those events. We are catching up a bit on our history debt, legacy debt. [indiscernible] my joining of the Management Board was also a certain change in the functioning and we joined the company at some stage in the development of those large projects, which are complex, which require resources. And if we want to assume liabilities like the ones that result from the power contracts is something that has to be done within a broader strategy, and that's what we are doing right now in order to be able to participate reasonably in the upcoming auctions. We will take part in the auction, but what the result of that will be, -- of course, that will depend on the competitive process. But I can tell you today that we will try to maximize our ability to win those power contracts and build the new gas fuel units as soon as possible.

Last question. Well, in fact, these are a few questions, but they are all related to funds from recovery and the resilience program. Are you applying for any additional funds? Are you applying those funds? And if so, for which companies?

We are in the process that regards PGE Distribution and PGE Railway Energy. But it's hard to talk about any specifics right now. Only after we receive confirmations, will we be able to discuss details and only after the relevant agreements with [indiscernible] signed, will you be informed about this as will the market.

Thank you very much. Now questions from the room. Please introduce yourself.

I have a few questions. Mr. President, I understand from what you have been saying that in Konin, you are considering building not only a large conventional nuclear power plant, but also putting up an SMR.

No. I have not said that we are considering any major change to what we are doing in Konin. But let me take a step back. In principle, we are considering various possible sites as being suitable for nuclear power plants or SMRs. Konin turns up in the governmental nuclear energy program as the second possible location. And again, in principle, we want to focus on location studies, what kind of power plant would be advisable in any particular location. But what actually will be built there is not within our remit. So these are the projects that are being carried out by the state treasury. So the answer is no. There is no decision on our part or no change of our view of the Konin location. What I meant was that our interest of buying a 50% stake from PAK was that we wanted to be the only owner of this company. The cooperation that our predecessors made with regard to collaboration with this company was not optimum from our perspective. That's why we are in talks now. If we conclude these talks successfully, we will have a company with a team able to examine more sites and with the relevant documentation. Then if at the governmental level, the decision is made to consider this specific location for the second nuclear power plant, then we should be able to make available this documentation. Thank you.

I also have a question to Mr. Jastrzebski. You have already made most of those impairment write-offs. But have you already made them for your coal units in Opole units 5 and 6. Have you already done this? Or is it still ahead of you?

In Opole, this is something that we still have on our balance sheet for both units.

Partially, the write-off was already done for those units, but there is a remainder still staying on our balance sheet.

So I have more questions. Estimate of prices for G11 tariff for next year. Do you think that it is possible to go down to the level of PLN 500 per megawatt hour? Your competitors talked yesterday about the amount of PLN 540. Do you think it is possible to go down to this level if PLN 500 is achievable at all? I would also like to ask you about cost of balancing the profile and system for renewables because, again, your market competitors calculated that those two variables amounted to PLN 120 per megawatt hour is going to multiply. And in the context of gas tenders, aren't you afraid that this market is too limited when it comes to the suppliers of technology and contractors? And will it not be the case of [indiscernible] again vis-a-vis your market competitors that you will be having to pick the supplier in a free procedure -- direct procedure?

That's what happens when you organize press conferences on results after our market competitors have already done so, especially the one that organized theirs yesterday. I did not listen to details, I must admit to what our colleagues were saying, but I did -- I must admit I received some summary, which, yes, really pertain to the first two issues, and that is price for next year and the issue of costs of profiling and the balance. Mr. [indiscernible] probably responded to that question very well, and he could be quoted on that. We are still at the level of contracting. Electricity for the G11 tariff group for next year. So we cannot really make a binding declaration today as to what the price will be in the tariff, especially because we do not fully know the extent of the costs, but also because this will be the outcome of a dialogue that we will be having with the Energy Regulatory Authority. The season for tariffs will start in the next quarter. That's early in quarter 4. We will be working intensely and having this dialogue. Now the way forward is well known. In G11, we will be lowering the prices. That's for sure. And our ambition is to lower them in a way that will make it possible for us to have profitable operations because, well, regardless of what happens, this is the duty of Management Board of the company that supplies electricity to individual customers. But on the other hand, we do understand that there is a reference point in terms of the frozen price of PLN 500 per megawatt hour, which as we understand, will remain frozen until the end of the year, at least these are the declarations that we've heard. So we do not expect this to be a good way forward to suddenly raise the prices from the 1st of January. Whether it will be PLN 540 or another amount, well, still today, this depends on a number of factors. And we -- assuming that we would -- we were to resolve one more issues -- one more issue, the balancing of consumers. That's one component that, in fact, impacts our operational costs. We could perhaps approach PLN 500 rather than what was announced yesterday, the PLN 540 that was mentioned. However, this is the space where we have freedom to move, I think. So we're looking for a figure that would sound good, but I wouldn't want to really disclose it today because it might be anchored in the comments and the news and references and still the tariffing process has its own dynamic. We try to present our own argument saying that we have the cost of energy that we are contracting. We have additionally costs that have to do with profiling operational costs. So I am hoping that we will be able to reach a rational compromise of the PLN 500 plus and wrap up the negotiations with the authority for next year. We have prosumers, there are quite a lot of them. We have the revenue, PDO turnover PDO distribution, 500,000 consumers, and that's quite an important volume of electricity that is introduced into the network especially this being a point that has to be taken on board with reference to the prosumers that are in net metering. They were treated in a preferential manner, very much so, I would say since we are the company serving these customers we need to deal with the cost of introducing this energy into the grid, and then delivering it to them. That was a very long answer to a very short question. So let me be concise for the rest of them profiling and balancing cost. Yes, those are significant cost, already now they are seen, they are the other side of the coin, which is also linked to the increasing weather-dependent sources in the network. We have I think over 35 gigawatts of power and 11 gigawatts of onshore and almost 25 -- around 25 GV, whereas this does not help definitely. It impacts the profile costs and well, actually, we are trying to minimize the transfer of this cost to our consumers, but yes I do agree that this is an important factor. I think perhaps PLN 100 per megawatt hour is a correct figure, and I think the way forward is well known. We are expecting these cost to be actually increasing. Point #3, regarding our tenders for Gryfino and lower order. That is a very pertinent question. We have seen one online before why didn't we win anything in the extra auction. It could have ended that way, we could have made a commitment before having the information about who and how much for would be performing the project, but this could have ended up in having unnecessary rush or lack of competitiveness. What we decided to do instead was to go ahead with a disciplined approach. We have announced the tenders for Gryfino and for Rybnik today. We want to find out what competitive bids will come forward before we make a commitment on the power mechanism in the market or capacity market whatever else. Right now, we see that there is interest in those projects. We can see that all the four typical suspects, the Siemens, GE, Ansaldo and Mitsubishi are companies that are interested in the Polish market. It seems to us that they will be or we will be able to get competitive bids from them. We are also hoping that the standards that we have set for how these tenders are organized will make an impact. We are quite clear about excluding third country suppliers, and we're hoping that this will not further limit that competitiveness. We're already seeing signs today that this does not translate into a decrease in interest. So we believe that the approach, the algorithm that we have adopted and the principles in the tenders are correct. And thanks to that, we will be able to create a good competitive environment, and we will be able to select such suppliers, such contractors that will not raise any doubts as to the security of performance of the project, but also such that we will bear in mind the fact that we have a strong preference for our local content. We do care about such projects, major projects, about PLN 2 billion plus. We do care about them being performed with the share of the Polish capital. Thank you very much.

[indiscernible] Podcast Energy Drink. I would like to ask about this SMR, where specifically could it be located? And have you already considered a possible technology? The second question is about the events of this morning. The blackout package presented by the operator assumes some activities for the protection of physical infrastructure. This morning, we discovered how important that is. Will PGE take any additional activities like applying for the EU funds for strengthening the resilience of the energy sector?

As for the second question, I think it is important in the context of what's going on -- we are aware of the need to ensure security, including physical security for our infrastructure. It is not the case that we have suddenly found ourselves in a situation where we have some infrastructure that suddenly requires additional protection. We have always had critical infrastructure. So we have always had procedures for the event of possible threats, either physical or cybersecurity threats. And we have always known that we have to bear this in mind. We have always understood this context of ensuring physical security. The actions that we take are the actions that have been taken systematically over the past months. We have been trying not necessarily to communicate all of these activities, but some of these, at least, like 450 project, ensuring communication for possible crisis events is essential. We saw that during the flooding where rescue services try to use mobile services, and it was not always effective. For sure, it wouldn't work in the situation of a blackout. So ensuring communication will be critical from our perspective. So this project is one of the initiatives that show that for quite a while now, we have been thinking about physical security and cybersecurity. Having large generation units and distribution network in the eastern part of Poland means that we are very disciplined in thinking about that. As for applying for EU funds, to enhance the security, wherever possible, we do that. And if new opportunities arise, we will use them. But the availability of those funds is not the main factor determining our investment. And I forgot your first question, SMR. Okay. We would very much like to understand the whole context regarding SMRs worldwide. I'm happy that now the discussions go beyond PowerPoint presentations because a couple of years ago everyone seemed to be convinced that SMRs would come up anywhere in the world. It -- SMR requires a different regime as compared to a regular nuclear power plant, but it still remains a form of nuclear energy generation plant. So first of all, we will consider our own sites where we are already operating in coal energy, Turów was mentioned, for example. And probably, it is there that we will start exploration. But I cannot tell you today that where such an SMR will be located. And I do not know in which year that will happen. Although we're taking all possible initiatives to analyze modular energy technologies. In particular, Turów, will be the first location for which location studies will be carried out.

[indiscernible] Polityka Insight. I have two questions about conventional energies and two about renewables. Let me start with the conventional energies. The Minister of Energy announced changes in a manner of tariffication for Heating with some funds being drawn from public funds and EU funds. Do you think these changes are realistic, will they be feasible to be implemented relatively quickly? And if so, how they will translate into your investments in Heating? And also your attitude to this new substitution capacity market, this can only concern individual capacities and small margin of capacities number. Then what happens about Baltica 3. What will be the way forward? Also, as I'm interested in wind farms with relatively low per turbine installed power that could be built relatively quickly. Do you prefer 4 or 5-megawatt products that need longer time to build? Or do you prefer those shorter ones?

To answer the first two of your questions about Heating. I do not want to put into question the initiatives that are taken by our supervisory authority or decision makers. We are pursuing a common goal. On the one hand, we want to complete the process of modernizing Polish Heating. And there is no doubt that decarbonization initiatives are in good direction. What has been done so far shows that heat can be generated in a more efficient manner. And it can be managed. In fact, the heating profile can be managed. Today, we are making pioneering decisions with regard to this market, and we already see this very promising direction of changes. We try to analyze all those decisions responsibly, we are in dialogue with the Ministry of Energy and Ministry of Environment. Decarbonization of Heating can take place and for sure it is better if it takes place not so quickly, the year 2030 is a very ambitious deadline. But if we give ourselves a bit more time and space, we can achieve the same result in a more efficient manner in an optimum manner. And again, without any comments on the developments in the regulatory environment, a lot will depend on cooperation with power grids. The most efficient model of the heating system is to coordinate investments in generation sources, and distribution networks on a local level, and we have already started very constructive talks with local government in locations where we do not own heating grids. We believe that this is one of the manners in which the reduction of capital expenditures can be achieved. Appropriate mix of sources of technology and at the same time, modernization of the grid can mean that the total expenditures can become optimum as compared to the situation of running those two processes separately. We have started the process already, and we believe that this is definitely a win-win situation, and I believe that reaching such an understanding may mean that we spend money in a more optimal manner. And that will translate to not forwarding the expenditure into tariffs. And another thing is that we see District Heating today, has some sort of an unnecessary element of the energy transformation. Well, for a long time, this was not a comfort zone for us in PGE. District Heating is something that we largely just bought when we acquired assets from EDF and we had to learn it. And I think that now we see that, well, if it's wisely planned, it can be a significant component of the energy transformation. And on the one hand, it electrify District Heating. That's one of the megatrend -- one of the two megatrends that will impact the increased demand to 2050. We are already doing it now so that we can use the infrastructure when the price gets really low. But on the other hand, in order to be able to use it more effectively, we very intensely analyzed each of our locations from the point of view of installing heat storage. Heat storage was something that will probably be more needed than we originally had thought. And first investments have already been put in place on a small scale, and they will be repeated definitely to a larger scale of the storage facilities. So we're not really trying to find fold with it, we're trying to be proactive, making sure that we can implement our investment plans. We are not in racing at least the deadlines that have been put for decarbonization. We're trying to skillfully and reasonably implement these processes by ensuring competitiveness of the tender process. We feel that these investments within gas engine or electrode, they can be put in place in a balanced way and then the outcome is good price, reliable contractor and a good investment process, which combined with what I said earlier, the coordination that with the modernizing of the network, it brings a long-term outcome. Your second question was about the more boring area. I think all of these areas are interesting. Hence, my question here because they are, and it was. Well, I can quote [indiscernible] as a matter of fact is the person who will make things happen in the development of the sector in Poland. He defines the flexible gas capacity -- determines the possibility of developing renewables. So the fact that was no big emphasis on the development of flexible capacity is negligence. You cannot manage -- you -- transformation does not necessarily have to increase the cost, but the transformation into renewables has to be done in a way that enables balancing the system. When the weather is not suitable when there's no wind, when there's no sun. And I think that as a role, we are part of the PSE plant, PSE sees the whole sector. And I think the whole initiatives -- the initiatives that are being defined by the Ministry of State Assets and also the team on carving out assets, they are largely being coordinated with the Polish network. And I think that thanks to the fact that they are being coordinated with the Polish electricity and energy networks. They stand a big chance of being successful because we can be integrated in any support system. And historically, we have managed on every auction in the capacity market. We have managed to successfully get contracts. But today, we feel the need for further evolution of the Polish segment to be more coordinated. And I think the fact that the management of the Polish electrical energy network has really made an effort to play an active role in the process is very good news. And we believe that thanks to that, the subsequent stages of this reform of the sector and introducing new mechanism will guarantee that this pathway will be made and chosen not having an impact on what this process looks like. We still have a very optimistic outlook on this process. And we are hopeful that in the near future, it will shape up and it will then subsequently be taken up and implemented in a dialogue with the EU. And Baltica 3 means that we have -- I think the best lesson we could have had, we could have learned for the offshore wind energy. Our partnership with Ørsted, is for better and for worse. We celebrated the success related to the final investment decision for Baltica 2. And in January, we made a formal communication that we have the financing package ready and that we are performing Baltica 2 without any delay whatsoever and in a perfect way. But Baltica 3 is part of the reconfiguration process since a while ago. And so we are taking a breath to see what's happening in Ørsted today. We know that, well, this is the time right now, the last few weeks or perhaps months and the next few weeks or perhaps months will be time for them to do the issue and to recognize what might happen to them in the future in the U.S. because quite frankly speaking, I do not envy them. I have had the opportunity to talk to people who manage Ørsted and I can see the challenge that they see up ahead. So the process of reconfiguring Baltica 3 is one of the topics that we talk about, but we also know that what's happening today around Ørsted may have an impact on the dynamic of the decisions they take. This does not have an impact on their appetite to perform the project. We have moved the deadline for the project implementation already. During our talks, we still are in CRD and we know that the project has to be performed sooner or later. But I would not be expecting a decision on Baltica 3 within the next few weeks to come, mostly because within the next week to come we will know -- we might know that Ørsted has the resources to deal with other things rather than its own issue or Revolution Wind or Sunrise or the big project that launched the issue. But in general, we're optimistic about Baltica 3. And as of today, we see no reason to question the feasibility of completing this project within the time scheduled in the support system granted to us. As for wind farms, we see what is going on. We see the dynamic of the dialogue between the Parliament and the Presidential Palace. We have already grown out of the 2-megawatt turbines and that is a major part of renewable sources in our group, and we have the skills and the capacity to maintain the turbines because you need to have the right skills. We, in effect, cut our teeth on operating these. That is our competitive advantage. So from this perspective, we can say that these are not better or worse. We are skillful in operating them definitely. Personally, I would probably prefer to have super large machines in the fancy projects. And probably we will have these soon. But if projects become available with the use of smaller machinery, definitely, we will use them because that is our comfort zone. Inland wind farms are our comfort zone. We know that we can not only make the right studies but we can also operate such turbines efficiently. The capacity installed in our portfolio confirms that perfectly. We are also in dialogue with those who are more efficient in operating those larger projects. That's why we are also interested in buying projects at various stages of development. Preferably, those at late stage of development or already operational projects. Our ambition is to build the portfolio at the capacity level of about 4,000 megawatt hours, as mentioned in our strategy, and we are interested in increasing this capacity significantly. That's it.

Pawel Puchalski, Santander. I have a few questions each on a different topic. First, distribution and WACC. What kind of WACC do you expect next year? The second question is about coal capacity and auction for next year? What coal fuel capacity will lose support in December 2025? Or how much you can put up for tomorrow's auction? Another question is about any possibility of PGE getting to a greater level of commitment in offshore given the situation in Ørsted? And the next question in one of the slides I saw there was a positive contribution of KPO programs on economic debt at the level of PLN 3.5 billion. Could you please explain this because I don't quite understand how external funding can reduce financial net debt.

Let me start with the first question, WACC. It's hard to answer what level of WACC there will be. We don't want to say what we expect, the minimum is 7.5%, and that's the minimum but we also assume that this level is going to be higher. We have certain tasks and investment plans. So it seems now that the president of the Regulatory Authority is aware that this is kind of compensation for investments being carried out. If we want to increase and increase significantly our CapEx on expansion and modernization of our distribution network, then a significant reduction of the parameter, which funds those investments would be counterproductive. As for amounts or levels, please forgive me, but I will not give you any details. And you have also another question about the debt from the recovery and resilience programs affects net debt. It reduces balance sheet debt. It's about valuation of debt according to net present value. According to the International Finance Reporting Standards, we have to value this way. Nominal value is close to the balance sheet value. But with the fixed interest rate 50% means that we received PLN 3.5 billion in cash. Well, our liability was valued at PLN 1.3 billion. The difference was recognized in the deferred periods, and we will recognize that 1/5 a year. So that's the result of a different interest rate under this program versus the market. In the short term, yes. You mentioned Baltica. That's not something we are considering right now. In Baltica, we are doing things as planned. We are implementing the project in the 50-50 format. And in our assessment, it is a good setup for the implementation of such projects. I do not see any reasons why we should change this before handing over this facility for operation, Ørsted, there is significant liability for offshore projects, and we want them to have skin in the game there. That would be our spontaneous answer to this question. If you ask this question more specifically, we would probably ask Ørsted what implications that would have. A bold statement could be that we are interested in offshore wind energy. We are interested in increasing investments on this segment, and we believe that the system of support from the first phase, good one. That's why we would very much like to complete Baltica 2 within the budget and on time. We think it's highly likely. As soon as possible, we will come back to the discussion about Baltica 3, and we will push very much for taking specific decisions about Baltica 3 because that is the subsequent stage, which makes it more likely to move on to the next stage of the project. Our partner today is Ørsted, but the collaboration with Ørsted shows that such large project, this offshore wind farms are better done in collaboration with a larger and more experienced partner. On our own, it would be difficult to decide to -- responsibly to complete this project.

And again, what bank did you say?

Tomorrow. If I could answer this question tomorrow, please. Well, it doesn't make any difference, does it because we're working long term. So I think this is one of the more sensitive types of information. I don't want to speculate. I don't want us to unnecessarily impact the decisions of our competitors during our -- during -- well, tomorrow.

Santander, out of curiosity, is it the same bank still or -- because I thought there was going to be coming out of some sort.

Okay, [indiscernible].

Good morning [indiscernible]. Just about auctions still. I wanted to check whether for the December auction for gas projects you are planning to report these to Rybnik and Gryfino or other gas projects perhaps? And another thing I wanted to come back to the May auction, supplementary auction, and ask you whether as an -- as important beneficiary of this auction, you are thinking of -- you believe that you should be remunerated for the first week of July and the first decade of September because that's when the decision of the European Commission was made given the derogation, would that money be lost? Would you not be getting remuneration for this? Is this clear? What is your position on this? And outside auctions, I would like to hear your comment about what changes you would be expecting on the electricity markets if the 55 obligation was introduced. It's not even the same group, but what would be the market consequences of that?

Okay. The auction in December will be subject to quite a lot of emotions. I don't think it's just us, but our competitors also did the homework and they wanted to launch as -- an important number of projects. We want to have readiness to be able to take on the auction as well. We have a subsequent project which is at a different type of advancement, different level of advancement. But I think that while listening to the interventions here, representatives of energy of -- we're hoping that the December auction is not the last one. We're hoping that on the one hand, the mechanisms that are being discussed will be created so fast that we can make it more probable to create these units within the next few months. But on the other hand, we are quite interested to see what the other projects -- how the other projects will develop and how the mechanisms will develop because this extra auction that was, as a matter of fact, organized with the thought to support the biggest possible number of new flexible gas units. It was allocated to DSR or foreign units. I'm not sure to what extent it fulfilled its original function. So we think that the -- outside the main auction that is planned, the subsequent auctions or whatever formats of support will be reflecting more the need, and we think that's how I understand it, of PSE to ensure the new flexible options.

So you are not excluding these extra auction?

If there is such an option, we'll definitely be deciding to take part in such format. So if PSE takes the decision -- this decision, we will be trying to make sure that the next subsequent auction is something that we're ready to and that we're ready with interesting projects. We have a pipeline of projects, which is quite widespread because I think looking at how PSE is using our Gryfino, here, they need the assets to stabilize the system in Poland and to make it possible to grow the renewable energy that we're interested in. And I think that's the first question, and that is it. The second question. The settlement since July to August, we were ready, we were ready to comply with this obligation to provide the service. So I think there is no reason why we should consider that this is a period we should -- for which we should not be remunerated. Our position is that as a rule, there was a service provided by us. So we should be remunerated for our preparedness, for our readiness to provide the service. We -- there is a dialogue going on, on that. We are trying to provide the arguments to support this. This is not a standard situation for the contracting party for PSE where there was no derogation for them for several dozen days. And I think for the July and first decade of August. Well, our remuneration that is due is not perhaps very significant from the point of view of our operations, but it's not an amount that we were just overlooked by saying that, well, well, let's forget about it. So as a rule, today without trying to assess the probability. The dialogue is still going on about this. That's all I can say. And the obligation, it seems that it should not have a significant impact on the prices of electricity. That's our first assessment. In the past, the -- this had an impact on price. It had -- it was a tendency, but it was linked not just to the fact that it was an obligation, but it was an obligation together with some accompanying events. So it's almost as if we were saying that today this doesn't seem to be having a very important impact on the prices of electricity, unless you want to add something sir?

[indiscernible] I hope you will be brief [indiscernible] I would like to ask you about distribution tariff for 2025. Do you expect a constant decrease and in the context of what Pawel Puchalski asked? Another question. The regulatory model so far has not provided for always this lending money or borrowing money at a price much different from the market price. Do you see any space for changes here?

Regarding this last part of your question, as of now, these tariffs are not included in subsidies, and loans have very attractive interest rates. So here, the exclusion does not apply. How should I put it? Whether we see in the space? Well, basically what -- in the case of distribution, what we get in the tariff mostly is reinvested. So it is a complex project, WACC and other solutions. Of course, we are in discussions and debates with the Regulatory Authority but I don't want to comment on any specific solutions. This is one bigger system, one bigger hole which should be analyzed in the context of the challenges ahead of us, in the context of the investments made. Both questions are about a philosophy underlying distribution tariffs. It seems to me that what is very relevant today is what we do with the benefits with the money that we generate from one or another tariff. Let me reiterate once again that this amount of over PLN 4 billion on expenditures to make reinvestment in distribution is just the beginning. In the upcoming decade, we are talking about the investment of the order of PLN 75 million. So these tariffs exist for us to make the expenditures. It's nice to talk about WACC or other ratios, but we believe -- mentioned about how this tariffs develops at the end of the day. Business customers have to think about costs of energy as well. I think it is a kind of paradox, the capital expenditures that we incur determine the manner of making more flexible the way in which clients use the energy. The grids are becoming smarter and smarter. And now our clients to a greater extent are able to invest in some generation installation with a meter. Our clients can more and more invest in energy storage. And in the next step that allows them to be more active participants of the market. Another consequence is that there are no longer recipients of electricity, and they can start being active players in the electricity market and very soon also of balancing capacities. So as a result, clients think no longer in terms of prices, but in terms of costs of electricity. Maybe not in the short term, but for sure in the medium-term perspective, clients can reduce their costs of electricity. It seems the key paradigm here to give a chance to the clients to reduce their costs. For example, also active users of electro-mobility. Very seriously, we think that we do have an idea how to reasonably invest money in those capital expenditures. And we have a good idea how to make our grid more flexible, how to make the possibilities of using electricity more flexible and how to increase the flexibility of participating in the electricity market and capacity market. As for preferential funding, I had a long conversation with the Marta Postula about how wisely we can spend the money borrowed from Bank Gospodarstwa Krajowego. We, as the energy company and Bank Gospodarstwa Krajowego have the understanding of the money being spent wisely. So there is lower interest rate, but the benefits are additive. The fact that we have lower costs of interest means that we can spend more money on investing. And we do that and responsibly so. In principle, we try to generate free cash flow as much as possible. But indeed, as of today, distribution and transfer generate the possibility of reforming the electricity system. On top of that, there is this ambition to build a flexible grid. And as a consequence, we can build more weather-dependent sources of energy. And we can make our economy even more competitive. So overall, it seems that if we look at the system -- as a system of communicating vessels, we see that it all makes sense. We get money from BGK in large amounts in a very reasonable way as an alternative of other ways of obtaining funding in a dialogue with the Regulatory Authority. So that is about the tariff update. Thank you very much. Thank you, all of you, ladies and gentlemen, for joining our conference. See you at the next conference. [Statements in English on this transcript were spoken by an interpreter present on the live call.]